10-K 1 d839495d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission File No. 001-35873

 

 

TAYLOR MORRISON HOME CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   90-0907433

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

4900 N. Scottsdale Road, Suite 2000, Scottsdale, Arizona 85251

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (480) 840-8100

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Class A Common Stock, $0.00001 par value   New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No    x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨      Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of voting stock held by non-affiliates of the registrant on June 30, 2014 was $737,350,395, based on the closing sales price per share as reported by the New York Stock Exchange on such date.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of February 27, 2015:

 

Class

   Outstanding  

Class A Common Stock, $0.00001 par value

     33,071,755   

Class B Common Stock, $0.00001 par value

     89,200,063   

Documents Incorporated by Reference

Portions of Part III of this Form 10-K are incorporated by reference from the Registrant’s definitive proxy statement for its 2015 annual meeting of shareholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year.

 

 

 


Table of Contents

TAYLOR MORRISON HOME CORPORATION

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2014

TABLE OF CONTENTS

 

         Page
Number
 
  PART I   

Item 1.

 

Business

     2   

Item 1A.

 

Risk Factors

     15   

Item 1B.

 

Unresolved Staff Comments

     34   

Item 2.

 

Properties

     35   

Item 3.

 

Legal Proceedings

     35   

Item 4.

 

Mine Safety Disclosures

     35   
  PART II   

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters  and Issuer Purchases of Equity Securities

     36   

Item 6.

 

Selected Financial Data

     38   

Item 7.

 

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

     39   

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

     63   

Item 8.

 

Financial Statements and Supplementary Data

     64   

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     106   

Item 9A.

 

Controls and Procedures

     106   

Item 9B.

 

Other Information

     107   
  PART III   

Item 10.

 

Directors, Executive Officers and Corporate Governance

     108   

Item 11.

 

Executive Compensation

     108   

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     108   

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

     109   

Item 14.

 

Principal Accounting Fees and Services

     109   
  PART IV   

Item 15.

 

Exhibits and Financial Statement Schedules

     109   
 

Signatures

     113   

 

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TAYLOR MORRISON HOME CORPORATION

 

     Page
Number
 

Report of Independent Registered Public Accounting Firm

     64   

Consolidated Balance Sheets as of December 31, 2014 and 2013

     65   

Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012

     66   

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012

     67   

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012

     68   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012

     69   

Notes to the Consolidated Financial Statements

     70   

Separate combined financial statements of our unconsolidated joint venture activities have been omitted because, if considered in the aggregate, they would not constitute a significant subsidiary as defined by Rule 3-09 of Regulation S-X.

 

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Available Information

Information about our company and communities is provided on our Internet websites at www.taylormorrison.com and www.darlinghomes.com (collectively, the “Taylor Morrison website”). The information contained on the Taylor Morrison websites is not considered part of this Annual Report on Form 10-K (“Annual Report”). Our periodic and current reports, including any amendments, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are available, free of charge, on our Taylor Morrison website as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). These filings are also available on the SEC’s website at www.sec.gov. In addition to our SEC filings, our corporate governance documents, including our Code of Conduct and Ethics and Corporate Governance Guidelines are available on the “Investor Relations” page of our Taylor Morrison website under “Corporate Governance.” Our stockholders may also obtain these documents in paper format free of charge upon request made to our Investor Relations department.

In this Annual Report, unless the context requires otherwise, references to “the Company,” “we,” “us,” or “our” are to Taylor Morrison Home Corporation (“TMHC”) and its subsidiaries.

The July 2007 merger between Taylor Woodrow plc and George Wimpey plc, two UK-based, publicly listed homebuilders, resulted in the formation of Taylor Wimpey plc (the “Predecessor Parent Company”), and the subsequent integration of Taylor Woodrow Holdings (USA), Inc. and Morrison Homes, Inc. in the U.S. resulting in Taylor Morrison Communities, Inc. (“Taylor Morrison Communities”, “Taylor Morrison” or “TMC”), and Monarch Corporation (“Monarch”) in Canada. Monarch was sold to a third party on January 28, 2015.

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.

Forward-Looking Statements

Certain information included in this Annual Report or in other materials we have filed or will file with the SEC (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act. You can identify these statements by the fact that they do not relate to matters of strictly historical or factual nature and generally discuss or relate to estimates or other expectations regarding future events. They contain words such as, but not limited to, “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,” “can,” “could,” “might,” “should” and other words or phrases of similar meaning in connection with any discussion of our strategy or future operating or financial performance. As you read this Annual Report and other reports or public statements, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions, including those described under the heading “Risk Factors” in Part I, Item 1A. and elsewhere in this Annual Report. Although we believe that these forward-looking statements are based upon reasonable assumptions, you should be aware that many factors, including those described under the heading “Risk Factors” in Part I, Item 1A. and elsewhere in this Annual Report, could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements.

Forward-looking statements speak only as of the date they are made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995, and all of our forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referenced in this section.

 

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PART I

ITEM 1. BUSINESS

General Overview

During 2014 we were one of the largest public homebuilders in North America, with communities located in the United States and Canada. In December 2014, we announced the strategic decision to sell our Canadian business and fully focus on our U.S. operations. We are now, and will continue to be, a leading public homebuilder in the United States. We are a real estate developer, with a portfolio of lifestyle and master-planned communities. We provide a diverse assortment of homes across a wide range of price points in order to appeal to a broad spectrum of customers. Our primary focus is on move-up buyers in traditionally high growth markets, where we design, build and sell single-family detached and attached homes. Our legacy of over 100 years of homebuilding experience drives our commitment to quality in every community we develop and every home we build. We operate under the Taylor Morrison and Darling Homes brand names in the United States. We also provide financial services to customers through our wholly owned mortgage subsidiary, Taylor Morrison Home Funding, LLC (“TMHF”).

Our long-term strategy is built on four pillars:

 

    opportunistic land acquisition in core locations;

 

    distinctive communities driven by consumer preferences;

 

    culture of strong cost efficiency; and

 

    optimizing profitability while achieving desired sales pace.

We are committed to creating and designing superior communities and building quality homes. Delivering on this commitment involves thoughtful design to accommodate the living environment needs of our customers and the surrounding community. We have developed elem3nts™ by Taylor Morrison, our eco-sensitive building program, which seeks to build energy-efficient homes by drawing on technology and building methods to lessen the carbon footprint of our homes. In recognition of our achievements in this area, we were awarded the 2014 Green Builder of the Year award by Green Builder Magazine.

Including our Canadian business, for the five years ended December 31, 2014 we delivered 24,413 homes and generated $9.3 billion of home closings revenue. We have delivered five consecutive years of operating profit and were one of the first builders to return to profitability in 2010. We believe that our balance sheet has both the liquidity and asset strength required to execute our growth strategy. We have raised over $900 million in corporate and joint venture financing since the beginning of 2013, and had a net debt to total book capitalization of 40.6% at December 31, 2014. As of and for the year ended December 31, 2014, we had cash and liquidity of approximately $800 million and total company revenue growth of over 33.6% year over year. Our home closings revenue for the U.S. and Canada for the year ended December 31, 2014 was $3.0 billion on 6,796 homes closed, excluding unconsolidated joint ventures.

During the year ended December 31, 2014 our U.S. operations were located in five states and generated home closings revenue of $2.6 billion and adjusted home closings gross margin of 23.0%. In the United States, we grew our average community count by 30.4% to 206, and ended 2014 with $1.1 billion in sales order backlog. We believe we benefit from a well-located land portfolio, primarily in homebuilding markets that have been leading the U.S. housing recovery. At December 31, 2014, we had approximately 425 current and future communities containing approximately 38,854 lots that we owned or controlled. Of these, we were offering homes in 224 communities at base prices generally ranging from $170,000 to $1,700,000. During the year ended December 31, 2014, we closed 5,642 homes in the United States, an increase of 19.6% over the prior year. The average sales price of homes closed during the year ended December 31, 2014 increased 17.8% to approximately $464,000.

 

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We are well positioned in our markets with a top-10 market share (based on 2014 home closings as reported by Metrostudy) in 13 of our 16 metropolitan markets. At December 31, 2014, we were operating in the following metropolitan areas:

 

East

  

West

•    Austin, Texas

  

•    Phoenix, Arizona

•    Dallas, Texas

  

•    Sacramento, California

•    Houston, Texas

  

•    San Francisco Bay Area, California

•    Fort Myers, Florida

  

•    San Jose, California

•    Jacksonville, Florida

  

•    Orange County, California

•    Naples, Florida

  

•    San Diego, California

•    Orlando, Florida

  

•    Denver, Colorado

•    Sarasota, Florida

  

•    Tampa Bay, Florida

  

We service these markets through ten operating divisions aggregated in two geographic reporting segments. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Overview in this Annual Report.

IPO and Summary of Reorganization Transactions

On April 12, 2013 we completed our initial public offering (“IPO”) of 32,857,800 shares of our Class A Common Stock, par value $0.00001 per share (the “Class A Common Stock”) on the New York Stock Exchange (“NYSE”). With an initial price to the public of $22.00 per share, it was the largest homebuilding IPO in the history of the NYSE. As a result of the completion of the IPO and a series of transactions pursuant to a Reorganization Agreement dated as of April 9, 2013, TMHC became the indirect parent of TMM Holdings Limited Partnership (“TMM Holdings”) through the formation of TMM Holdings II Limited Partnership, a Cayman Islands limited partnership (“New TMM”). TMM Holdings is a British Columbia limited partnership that acquired our operations in July 2011 and is currently the holding company for all of our operations. It was formed in 2011 by a consortium comprised of affiliates of TPG Global, LLC (the “TPG Entities” or “TPG”), investment funds managed by Oaktree Capital Management, L.P. (“Oaktree”) or their respective subsidiaries (the “Oaktree Entities”), and affiliates of JH Investments, Inc. (“JH” and together with the TPG Entities and Oaktree Entities, the “Principal Equityholders”).

In addition to our Class A Common Stock, we have shares of Class B Common Stock, par value $0.00001 per share (the “Class B Common Stock”) outstanding. Holders of the Class A Common Stock and Class B Common Stock are entitled to one vote for each share held on all matters submitted to stockholders for their vote or approval. The holders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters submitted to stockholders for their vote or approval, except with respect to the amendment of certain provisions of the amended and restated Certificate of Incorporation that would alter or change the powers, preferences or special rights of the Class B Common Stock so as to affect them adversely. Such amendments must be approved by a majority of the votes entitled to be cast by the holders of the shares affected by the amendment, voting as a separate class, or as otherwise required by applicable law.

For each share of TMHC Class A Common Stock outstanding, TMHC holds one limited partnership interest in New TMM (each, a “New TMM Unit”). The Principal Equityholders (through holding vehicles) hold New TMM Units and

 

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one corresponding share of Class B Common Stock for each New TMM Unit they hold. As a result, the Class A Common Stock and Class B Common Stock percentages at December 31, 2014 are as follows:

 

     Shares
Outstanding
     Percentage  

Class A Common Stock

     33,060,540         27.0

Class B Common Stock

     89,227,416         73.0   
  

 

 

    

 

 

 

Total

  122,287,956      100.0

The Class A Common Stock is held by the public. The Class B Common Stock is beneficially owned by the TPG Entities and the Oaktree Entities, so together, they have voting power over more than a majority of our outstanding voting stock. See Risk Factors — The Principal Equityholders have substantial influence over our business, and their interests may differ from our interests or those of our other stockholders.

For more information on the reorganization transactions and the 2011 acquisition by the Principal Equityholders, please refer to — 2011 Acquisition by our Principal Equityholders and — Reorganization and Initial Public Offering.

Recent Developments

On January 28, 2015 we closed the sale of Monarch Corporation, which held our Canadian operations, to an affiliate of Mattamy Homes Limited (“Mattamy”). Mattamy delivered a cash purchase price of CAD $335 million at closing, which is subject to certain customary post-closing adjustments and ordinary and customary indemnifications. Immediately prior to the closing, approximately CAD $235 million of cash at Monarch was distributed to a subsidiary of TMM Holdings, resulting in total proceeds to us of CAD $570 million. The net proceeds of the transaction will be used for general corporate purposes, resulting in increased flexibility for us to invest further in U.S. markets.

Business Strategy

We deliver on our strategy by opportunistically acquiring prime land assets in core locations, focusing on the preferences of our buyers, constantly evaluating and analyzing overhead efficiency and optimizing profit by managing volume. We constantly assess our capital allocation strategy to drive long-term shareholder return. We also take advantage of opportunities to partner in joint ventures as they arise in order to secure land, share risk and maximize returns.

During the most recent economic downturn, we adhered to our core business strategy of focusing on move-up buyers. We believe our experience in the move-up market allows us to significantly expand our new home offerings at higher price points. We believe that move-up homebuyers are more insulated from market volatility, and more likely to value the quality of lifestyle and construction that we offer.

We believe our extensive land position and pipeline, located in highly desirable submarkets, have positioned us for strategic growth and increased profitability in an improving housing market. We expect to execute this strategy by:

 

    Driving revenue by strategically opening new communities from existing land supply;

 

    Combining land acquisition and development expertise with homebuilding operations;

 

    Focusing offerings on specific customer groups;

 

    Building aspirational homes for our customers and delivering superior customer service;

 

    Maintaining a strong capital structure;

 

    Selectively pursuing acquisitions; and

 

    Employing and retaining a highly experienced management team with a strong operating track record.

 

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Homebuilding Operations

Homebuilding Overview

We focus on developing “lifestyle” communities in core locations, which have many distinguishing attributes, including proximity to job centers, strong school systems and a variety of local amenities in well-regarded submarkets. We offer a range of designs, some of them award-winning, through our single-family detached and attached product lines. We engineer our homes for energy-efficiency and cost savings to reduce the impact on the environment. Although the majority of the communities we build primarily attract move-up buyers, our portfolio also includes quality entry-level, luxury and 55+ products. We serve all generational groups through our products and focus on the needs of homebuyers. During 2014, the allocation of sales in our portfolio, based on price point, was 16% entry-level, 36% first move up, 31% second move-up, 15% 55+ and 2% urban infill.

We strive to maintain consumer product and price level diversification. We target the largest and most profitable consumer groups while attempting to balance our regional market portfolios across a variety of demographics. Our ability to build at multiple price points enables us to respond to changing consumer preferences and address shifts in affordability. We also use measures of market specific supply and demand characteristics to determine which consumer groups are ultimately targeted and will be the most profitable in a specific land position.

We generally operate as community developers. Community development includes the acquisition and development of large-scale communities that may include significant planning and entitlement approvals and construction of off-site and on-site utilities and infrastructure. In some communities we operate solely as merchant builders, in which case, we acquire fully planned and entitled lots and may construct on-site improvements but normally do not construct significant off-site utility or infrastructure improvements.

We develop, own and operate golf courses as well as amenity rich community centers associated with a number of our master planned communities. In 2014, our Esplanade Golf & Country Clubs in Naples and Lakewood Ranch, Florida were voted two of the top ten new courses in the United States by Golf Digest. We also have investments in, and are participants in, a number of joint ventures with related and unrelated parties to develop land and master-planned communities.

We have developed a number of home designs with features such as single-story living, split bedroom plans and first floor master bedroom suites to appeal to universal design needs. We have integrated these designs and features in many of our homes and communities. We engage unaffiliated architectural firms and internal architectural resources to develop new designs and augment existing plans in order to ensure that our homes reflect current and local consumer tastes. During the past year, we introduced 143 new single-family detached and attached floor plans.

The life cycle of a community generally ranges from three to five years, commencing with the acquisition of land, continuing through the land development phase, and concluding with the sale, construction, and delivery of homes. Actual community lives will vary based on the size of the community, the sales absorption rate, and whether we purchased the property as raw land or as developed lots.

A summary of our U.S. homebuilding activity by segment as of and for the year ended December 31, 2014 is as follows:

(Dollars in thousands)

     Year Ended December 31, 2014      At December 31, 2014  
     Homes
Closed
     Average
Selling Price
of Closed
Homes
     Homes
Sold
     Average
Active Selling
Communities
     Homes in
Backlog
     $ Value of
Backlog
 

East

     3,578       $ 420         3,743         151         1,709       $ 806,848   

West

     2,064         540         1,985         55         543         292,919   
  

 

 

       

 

 

    

 

 

    

 

 

    

 

 

 

Total

  5,642    $ 464      5,728      206      2,252    $ 1,099,767   
  

 

 

       

 

 

    

 

 

    

 

 

    

 

 

 

For financial information about our segments, see Note 18 — Operating and Reporting Segments to our consolidated financial statements for the year ended December 31, 2014.

 

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Land Acquisition Policies and Development

Locating and acquiring suitable land positions is a core part of our strategy as a developer and homebuilder. In order to maximize our expected risk-adjusted return, the allocation of capital for land investment is performed at the corporate level with a disciplined approach to overall portfolio management. Our investment committee meets on a regular basis, and consists of four of our senior executives. Annually, our operating divisions prepare a strategic plan for their specific geographies. Macro and micro indices, such as employment, housing starts, new home sales, re-sales and foreclosures, along with market related shifts in competition, land availability and consumer preferences, are carefully analyzed to determine the land and homebuilding strategy. Supply and demand are analyzed on a consumer segment and submarket basis to ensure land investment is targeted appropriately. The long-term plan is compared on an ongoing basis to current conditions in the marketplace as they evolve and is adjusted to the extent necessary. Major development strategy decisions regarding community positioning are included in the underwriting process and are made in consultation with senior members of our management team. Our existing land portfolio as of December 31, 2014 and 2013 is detailed below:

 

    Owned Lots December 31, 2014     Controlled Lots December 31, 2014        
    Raw     Partially
Developed
    Finished     Long-
Term
Strategic
Assets
    Total     Raw     Partially
Developed
    Finished     Total     Total
Owned and
Controlled
 

East

    7,090        6,112        5,220        1,952        20,374        5,508        1,510        605        7,623        27,997   

West

    2,735        2,568        3,507        1,612        10,422        246        122        67        435        10,857   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  9,825      8,680      8,727      3,564      30,796      5,754      1,632      672      8,058      38,854   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Owned Lots December 31, 2013     Controlled Lots December 31, 2013        
    Raw     Partially
Developed
    Finished     Long-
Term
Strategic
Assets
    Total     Raw     Partially
Developed
    Finished     Total     Total
Owned and
Controlled
 

East

    8,768        6,110        4,368        1,922        21,168        7,028        876        901        8,805        29,973   

West

    2,818        2,721        2,849        1,807        10,195        1,897        121        45        2,063        12,258   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  11,586      8,831      7,217      3,729      31,363      8,925      997      946      10,868      42,231   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In the land purchasing process, specific projects of interest are detailed by the local divisional team, including proposed ownership structure, environmental concerns, anticipated product segmentation, competitive environment and financial returns. We also determine whether further spending on currently owned and controlled land is a well-timed and appropriate use of capital. Our investment strategy emphasizes expected profitability to reflect the risk and timing of returns, and the level of sales volume in new and existing markets.

Lot Development Status

 

(Dollars in thousands)    As of December 31, 2014      As of December 31, 2013  

Development Status

   Owned Lots      Book Value of Land
and Development
     Owned Lots      Book Value of Land
and Development
 

Raw land

     9,825       $ 464,882         11,586       $ 381,836   

Partially developed

     8,680         654,759         8,831         474,756   

Finished lots

     8,727         787,033         7,217         666,753   

Long-term strategic assets

     3,564         27,993         3,729         27,988   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  30,796    $ 1,934,667      31,363    $ 1,551,333   
  

 

 

    

 

 

    

 

 

    

 

 

 

Raw land represents property that has not been developed and remains in its natural state. Partially developed represents land where the grading and development process has begun. Finished lots represent those lots where the horizontal development is complete and are ready for the vertical development. Long-term strategic assets are those lots where we are currently not doing any development.

 

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At December 31, 2014, the allocation of lots held in our land portfolio, by year acquired, was 16% in 2014, 22% in 2013, 22% in 2012, and 40% in 2011 and earlier.

Homes in Inventory

We manage our inventory of homes under construction by selectively commencing construction to capture new home demand, while monitoring the number and aging of unsold homes. As of December 31, 2014, we had a total of 3,606 homes in inventory, which included 2,252 homes under contract but not yet closed.

The following is a summary of our homes in inventory by segment as of December 31, 2014:

 

(Dollars in thousands)    Homes in
Backlog
     Models      Inventory
to be Sold
     Total      Inventory
Value
without
Land
 

East

     1,709         199         572         2,480       $ 288,423   

West

     543         119         464         1,126         193,654   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  2,252      318      1,036      3,606    $ 482,077   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We expect that during 2015 we will deliver substantially all homes in backlog at December 31, 2014.

Community Development

We create a complete concept for each community, beginning with an overall community layout and then determine the size, style and price range of the homes, the layout of the streets and positioning of the individual home sites. After necessary governmental and other approvals have been obtained, we improve the land by clearing and grading, installing roads, underground utility lines, staking out individual home sites and, in certain communities, erecting distinctive entrance structures and recreational amenities.

Each community has personnel that perform superintendent, sales and customer service functions, in conjunction with a local management team to manage the general project.

Although the construction time for our homes varies from project to project depending on geographic region, the time of year, the size and complexity of the homes, local labor situations, the governmental approval processes, availability of materials and supplies, and other factors, we complete the construction of a typical home in approximately six months.

Procurement and Construction

We have a comprehensive procurement program that leverages our size and national presence to achieve efficiencies and cost savings. Our objective in procurement is to maximize efficiencies on local, regional and national levels and to ensure consistent utilization of established contractual arrangements.

The program currently involves over 40 vendors and includes highly reputable and well-established companies who supply us with lumber, appliances, HVAC systems, insulation, roofing, paint and lighting, among other materials. Through these relationships, we are able to realize savings on the costs of essential materials. Contracts are typically structured to include a blend of attractive upfront pricing and rebates and, in some cases, advantageous retroactive pricing in instances of contract renewals. The program arrangements are typically not designed to be completely exclusive in nature; for example, in many instances, divisions may choose to use local or alternate suppliers if they find cost savings by doing so. However, our divisions have historically made use of over 80% of our national procurement contracts, largely as a result of the advantageous pricing available under such contracts.

In addition to cost advantages, these arrangements also help minimize the risk of construction delays during supply shortages, as we are often able to leverage our size to obtain our full allocation of required materials. Furthermore, these arrangements sometimes include provisions for cooperative marketing, which allow us to extend the reach and effectiveness of our advertising efforts.

 

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Trades and Labor

Our construction, land and purchasing managers coordinate subcontracting services and supervise all aspects of construction work and quality control. We are a general contractor for all of our homebuilding projects in the U.S. Subcontractors perform all home construction and land development work, generally under fixed-price contracts. The availability of labor, specifically as it relates to qualified tradespeople, at reasonable prices is a challenge in some markets as the supply chain responds to uneven industry growth and other economic factors that affect the number of people in the workforce.

Sources and Availability of Raw Materials

Based on local market practices, we either directly, or indirectly through our subcontractors, purchase drywall, cement, steel, lumber, insulation and the other building materials necessary to construct a home. While these materials are generally widely available from a variety of sources, from time to time we experience material shortages on a localized basis, particularly during periods where the regions in which we operate experience natural disasters that have a significant impact on existing residential and commercial structures and during periods of robust construction activity when there is high demand for newly built homes. During these periods, the prices for these materials can substantially increase and our construction process can be slowed. We generally have multiple sources for the materials we purchase and have not experienced significant delays due to unavailability of necessary materials.

Sales and Marketing

Our marketing program calls for a balanced approach of corporate support and local expertise to attract potential homebuyers in a focused, efficient and cost-effective manner. Our sales and marketing team provides a generalized marketing framework across our regional operations as well as sales training to our local teams. Our divisional sales and marketing teams utilize local media and marketing streams to deliver a unique message that is relevant to our consumer groups in each market.

Our goal is to identify the preferences of our customer and demographic groups and offer them innovative, high-quality products that are efficient and profitable to build. To achieve this goal, we conduct extensive market research to determine preferences of our customer groups and are able to focus on particular lifestyle preferences in determining the product to build.

We have gathered data regarding specific consumer preferences for various customer groups. Our approach to customer group identification guides all of our operations from the initial land acquisition through to our design, building, marketing and delivery of homes and our ongoing after-sales customer service. Among our peers, we believe we are at the forefront of directed marketing strategies, as evidenced by our highly-trafficked Internet site and strategic partnerships with nationally recognized retailers.

The central element of our marketing platform is our web presence at www.taylormorrison.com and www.darlinghomes.com (none of which is a part of this Annual Report). The main purpose of these websites is to direct potential customers to one of our sales teams. The website also offers the ability of customers to evaluate floor plans, elevations, square footage, community amenities and geographic location. Customers are also able to use the websites to make inquiries and to receive a prompt response from one of our “Internet Home Consultants.” The websites are fully integrated with our customer relationship management (“CRM”) system. By analyzing the content of the CRM, we are able to focus our lead generation programs to deliver high-quality sales leads. With these leads we are better able to increase sale conversion rates and lower marketing costs. We have significant web search optimization on our sites, including specific key words, meta data and tags on the site to help crawlers from search engines to find content.

In addition to our website, we utilize print, radio and television for advertising purposes, including directional marketing, newspapers and billboards. We also directly notify local real estate agents and firms of any new community openings in order to use the existing real estate agent/broker channels in each market. Pricing for our homes is evaluated weekly based on an analysis of market conditions, competitive environment and supply and demand characteristics.

 

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We use furnished model homes as a marketing tool to demonstrate the advantages of the designs, features and functionality of our homes. We generally employ or contract with interior and landscape designers who create attractive model homes that highlight the features and options available for the product line within a project. Depending upon the number of homes to be built in the project and the product lines to be offered, we generally build between one and three model homes for each active selling community. At December 31, 2014, we owned 318 model homes in 192 different communities.

Generally, our homes are sold by our commissioned employees who work from sales offices located within our model homes. We also employ a team of Internet sales associates who offer assistance to potential buyers viewing our homes over the Internet. At December 31, 2014, we had approximately 390 full-time sales and marketing personnel. Our goal is to ensure our sales force has extensive knowledge of our homes, energy efficient features, sales strategies, mortgage options and community dynamics. To achieve this goal, we have on-going training for our sales associates and conduct regular meetings to keep them abreast of the latest promotions, options and sales techniques and discuss geographic competition. Our sales associates are licensed real estate agents where required by law and assist our customers in adding design features to their homes, which we believe appeal to local consumer preferences. Third-party brokers who sell our homes are generally paid a sales commission based on the price of the home. In some of our businesses, we contract with third-party design studios that specialize in assisting our homebuyers with options and upgrades to personalize their homes. Utilizing these third-party design studios allows us to manage our overhead and costs more efficiently. We may also offer various sales incentives, including price concessions, assistance with closing costs, and landscaping or interior upgrades. The use, types and amount of incentives depends largely on existing economic and local competitive market conditions.

Warranty Program

We offer warranties on homes that generally provide for limited one-year warranty to cover various defects in workmanship or materials or to cover structural construction defects. We may also facilitate a ten year warranty in certain markets or to comply with regulatory requirements. The structural warranty is carried by Beneva Indemnity Company (“Beneva”), one of our wholly owned subsidiaries. We also provide third-party warranty coverage on homes where required by Federal Housing Administration or Veterans Administration lenders.

Competition

The homebuilding business is highly competitive and fragmented. We compete with numerous homebuilders of varying sizes, ranging from local to national in scope, some of which have greater sales and financial resources than us. Sales of existing homes, whether by a homeowner or by a financial institution that has acquired a home through a foreclosure, also provide competition. We compete primarily on the basis of price, location, design, quality, service and reputation.

Competition among residential homebuilders of all sizes is based on a number of interrelated factors, including location, reputation, amenities, floor plans, design, quality and price. We believe that we compare favorably to other homebuilders in the markets in which we operate.

In order to maximize our sales volumes, profitability and product strategy, we strive to understand our competition and their pricing, product and sales volume strategies and results. During the most recent economic downturn, market conditions also led to a large number of foreclosed and short sale homes being offered for sale, which increased competition and affected pricing. However, we took a proactive approach to distancing ourselves from highly affected submarkets, enabling us to drive sales in our markets without competing as directly with foreclosures.

Mortgage Operations

TMHF provides a number of mortgage-related services to our customers through our mortgage lending operations. The strategic purpose of TMHF is:

 

    to utilize mortgage finance as a sales tool in the purchase process to ensure a consistent customer experience and assist in maintaining production efficiency; and

 

    to control and assist in determining our backlog quality and to better manage projected closing and delivery dates for our customers.

 

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TMHF operates as an independent mortgage banker and conducts its business as a Federal Housing Authority (“FHA”) Full Eagle lender. TMHF funds mortgage loans utilizing warehouse credit line facilities. Revenue is earned through origination and processing fees combined with service release premiums earned in the secondary market once the loans are sold to investors. Loans are sold servicing released, typically within 20 business days.

TMHF competes with other mortgage lenders, including national, regional and local mortgage bankers and other financial institutions. TMHF utilizes a multi-investor correspondent platform which gives us increased flexibility when placing loans to meet our customers’ needs. TMHF has continued to expand and strengthen our investor partnerships. This has created stability and consistency in our origination process and delivery. In 2014 we experienced increased competition in our mortgage operations business as the industry focused on growing originations from purchases. Our focus and expertise has always been and remains dedicated to the financing of new home construction.

Seasonality

Our business is seasonal. We have historically experienced, and expect to continue to experience, variability in our results on a quarterly basis. We generally have more homes under construction, close more homes and have greater revenues and operating income in the third and fourth quarters of the year. Therefore, although new home contracts are obtained throughout the year, a significant portion of our home closings occur during the third and fourth calendar quarters. Our revenue therefore may fluctuate significantly on a quarterly basis and we must maintain sufficient liquidity to meet short-term operating requirements. Factors expected to contribute to these fluctuations include:

 

    the timing of the introduction and start of construction of new projects;

 

    the timing of project sales;

 

    the timing of closings of homes, lots and parcels;

 

    our ability to continue to acquire land and options on acceptable terms;

 

    the timing of receipt of regulatory approvals for development and construction;

 

    the condition of the real estate market and general economic conditions in the areas in which we operate;

 

    mix of homes closed;

 

    construction timetables;

 

    the prevailing interest rates and the availability of financing, both for us and for the purchasers of our homes;

 

    the cost and availability of materials and labor; and

 

    weather conditions in the markets in which we build.

As a result of seasonal activity, our quarterly results of operations and financial position are not necessarily representative of a full fiscal year. To illustrate the seasonality in net homes sold, homes closed and home closings revenue, a summary of the quarterly financial data follows:

 

    2014     2013(1)  
    March 31     June 30     September 30     December 31     March 31     June 30     September 30     December 31  

Net homes sold

    26.4     26.8     24.2     22.6     30.9     28.0     20.3     20.8

Homes closed

    18.7     22.8     23.6     34.9     19.2     24.4     25.4     31.0

Home closings revenue

    17.4     22.2     23.5     36.9     17.3     23.5     25.8     33.4

Net income from continuing operations

    16.4     20.1     21.9     41.6     57.2     (307.8 )%      108.1     242.5

 

(1)  The IPO occurred in April 2013, and as such, certain one-time charges affected net income from continuing operations.

 

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Regulation, Environmental, Health and Safety Matters

Regulatory

We are subject to various local, state and federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulations that impose restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular property or locality. In a number of our markets, there has been an increase in state and local legislation authorizing the acquisition of land as dedicated open space, mainly by governmental, quasi-public and non-profit entities. In addition, we are subject to various licensing, registration and filing requirements in connection with the construction, advertisement and sale of homes in our communities. The impact of these laws has been to increase our overall costs, and may have delayed the opening of communities or caused us to conclude that development of particular communities would not be economically feasible, even if any or all necessary governmental approvals were obtained. We also may be subject to periodic delays or may be precluded entirely from developing communities due to building moratoriums in one or more of the areas in which we operate. Generally, such moratoriums relate to insufficient water, power, drainage or sewage facilities or inadequate road capacity.

In order to secure certain approvals in some areas, we may be required to provide affordable housing at below market rental or sales prices. The impact on us depends on how the various state and local governments in the areas in which we engage, or intend to engage, in development implement their programs for affordable housing. To date, these restrictions have not had a material impact on us.

TMHF is subject to various state and federal statutes, rules and regulations, including those that relate to licensing, lending operations and other areas of mortgage origination and financing. The impact of those statutes, rules and regulations can increase our homebuyers’ cost of financing, increase our cost of doing business, as well as restrict our homebuyers’ access to some types of loans. Certain requirements provided for by the Dodd-Frank Act have not yet been finalized or fully implemented. The effect of such provisions on our financial services business will depend on the rules that are ultimately enacted.

In order for our homebuyers to finance their home purchases with FHA-insured, Veterans Administration-guaranteed or U.S. Department of Agriculture-guaranteed mortgages, we are required to build such homes in accordance with the regulatory requirements of those agencies.

Some states have statutory disclosure requirements or other pre-approval requirements or limitations governing the marketing and sale of new homes. These requirements vary widely from state to state.

Some states require us to be registered as a licensed contractor, a licensed real estate broker and in some markets our sales agents are additionally required to be registered as licensed real estate agents.

Environmental

We also are subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of public health and the environment (collectively, “environmental laws”). The particular environmental laws that apply to any given community vary greatly according to the location and environmental condition of the site and the present and former uses of the site. Complying with these environmental laws may result in delays, may cause us to incur substantial compliance and other costs, and/or may prohibit or severely restrict development in certain environmentally sensitive regions or areas.

As part of the land acquisition due diligence process, we utilize environmental assessments to identify environmental conditions that may exist on potential acquisition properties. To date, environmental site assessments conducted at our properties have not revealed any environmental liability or compliance concerns that we believe would have a material adverse effect on our business, liquidity or results of operations, nor are we aware of any material environmental liability or concerns.

We manage compliance with federal, state and local environmental requirements at the division level with assistance from the corporate and regional legal departments, including environmental regulations related to U.S. Storm Water

 

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Pollution Prevention, U.S. Endangered Species Act, U.S. Wetlands Permitting, NPDES Permitting, Cultural Resources, dust control measures and state and local preservation ordinances.

Health and Safety

We are committed to maintaining high standards in health and safety at all of our sites, to ensure the safety of our team members, our trade partners, our customers and prospects and the general public. That commitment is tested through our health and safety audit system that includes comprehensive twice-yearly independent third-party inspections of selected sites covering all aspects of health and safety. A key area of focus is ensuring that site conditions meet exacting health and safety standards and that subcontractor performance throughout our operating areas meets or exceeds expectations. All of our team members must complete an assigned curriculum of online safety courses each year. These courses vary according to job responsibility. In addition, groups such as construction and field personnel are required to attend additional training programs such as the Occupational Safety and Health Administration 10-hour course, First-Aid and CPR.

Information Technology

We have a centralized information technology organization with its core team located at our corporate headquarters in Scottsdale, augmented with field support technicians in key locations across the U.S. Our approach to information technology is to continuously simplify our information technology platform and consolidate and standardize applications. We believe a common application platform enables the sharing of ideas and rapid implementation of process improvements and best practices across the entire company. Our back-office operations use a fully integrated, industry recognized enterprise resource planning package. Marketing and field sales utilize a leading CRM solution that tracks leads and prospects from all sources and manages the customer communication process from lead creation through the buying process and beyond the post-warranty period. Field operations teams collaborate with the supply chain to schedule and manage development and construction projects with a set of standard and widely used homebuilding industry solutions.

Intellectual Property

We own certain logos and trademarks that are important to our overall branding and sales strategy. Our consumer logos are designed to draw on a recognized homebuilding heritage while emphasizing a customer-centric focus.

Employees, Subcontractors and Consultants

As of December 31, 2014, we employed 1,498 full-time equivalent persons, which includes 195 employees in our discontinued Canadian business. Of these, 1,348 were engaged in corporate and homebuilding operations, and the remaining 150 were engaged in mortgage services. As of December 31, 2014, we were not subject to collective bargaining agreements. We consider our employee relations to be good.

We act solely as a general contractor, and all construction operations are supervised by our project managers and field superintendents who manage third party subcontractors. We use independent consultants and contractors for some architectural, engineering, advertising and legal services, and we strive to maintain good relationships with our subcontractors and independent consultants and contractors.

2011 Acquisition by our Principal Equityholders

In July 2011, TPG, Oaktree and JH formed TMM Holdings to acquire TMC and Monarch from U.K. based Taylor Wimpey plc for aggregate cash consideration of approximately $1.2 billion (the “Acquisition”). In the acquisition, Class A Units of TMM Holdings were issued to TPG and Oaktree, Class J Units of TMM Holdings were issued to JH, and Class A and Class M Units of TMM Holdings were issued to were issued to various members of our Board of Directors and management.

The Acquisition was financed in part by a $620.3 million cash equity contribution by the Principal Equityholders and a $625 million senior unsecured credit facility with affiliates of TPG and Oaktree, consisting of a $500 million bridge loan

 

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facility and a $125 million incremental bridge loan facility (collectively, the “Sponsor Loan”). We repaid the $125 million bridge facility in August 2011 and repaid $350 million of the Sponsor Loan in April 2012 with a portion of the proceeds of the issuance of $550 million of 7.75% Senior Notes due 2020 (the “2020 Senior Notes”). 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 Holdings, and affiliates of TPG and Oaktree acquired an additional $150.0 million of limited partnership interests in TMM Holdings.

Reorganization and Initial Public Offering

In connection with the completion of the IPO, we completed a series of transactions (the “Reorganization Transactions”) in which TMHC became the indirect parent of TMM Holdings through the formation of a new Cayman Islands limited partnership, New TMM. New TMM has only a single class of partnership units, New TMM Units, which are held (as described below) by TMHC and by entities affiliated with the Principal Equityholders.

In the Reorganization Transactions:

 

    TPG and Oaktree each formed new holding vehicles to hold interests in New TMM (the “TPG Holding Vehicle” and the “Oaktree Holding Vehicle,” respectively and, together, the “TPG and Oaktree Holding Vehicles”);

 

    The Principal Equityholders and members of TMHC’s management and Board directly or indirectly exchanged all of their respective Class A Units, Class J Units and performance-vesting Class M Units in TMM Holdings 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 Holdings surrendered for exchange;

 

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

 

    Members of TMHC’s management and Board exchanged all of their time-vesting Class M Units in TMM Holdings for New TMM Units with vesting terms that are substantially the same as those of the Class M Units surrendered for exchange;

 

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

 

    The TPG and Oaktree Holding Vehicles directly or indirectly acquired New TMM Units.

The number of New TMM Units issued to each of the TPG and Oaktree Holding Vehicles, JH and members of TMHC’s management and Board, as described above, was determined based on a hypothetical cash distribution by TMM Holdings of TMHC’s pre-IPO value to the holders of Class A Units, Class J Units and Class M Units of TMM Holdings, the IPO price and the price per share paid by the underwriters for shares of Class A Common Stock in the IPO.

In connection with the Reorganization Transactions, the TPG and Oaktree Holding Vehicles, JH and members of TMHC’s management and Board were also issued a number of shares of TMHC’s Class B Common Stock equal to the number of New TMM Units that each received. One share of Class B Common Stock, together with one New TMM Unit is exchangeable into one share of Class A Common Stock. We granted the Principal Equityholders registration rights with respect to the resale of any such shares of Class A Common Stock that they receive in any such exchange. See Risk Factors — The Principal Equityholders have substantial influence over our business, and their interests may differ from our interests or those of our other stockholders.

In connection with the Reorganization Transactions, TMHC recorded a one-time, non-cash charge of $80.2 million (based on the IPO price of $22.00 and other factors) in respect of the modification of the Class J Units in TMM resulting from the termination of a management services agreement that was entered into in connection with the Acquisition between JH and TMM Holdings (the “JHI Services Agreement”) 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.

 

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In connection with the Acquisition in July 2011, affiliates of the Principal Equityholders entered into management services agreements with TMM Holdings, Taylor Morrison Holdings, Inc. (“Taylor Morrison Holdings”) and Monarch Communities Inc. (“Monarch Communities”) relating to the provision of certain management, advisory and consulting services. In consideration of financial and structural advice and analysis made in connection with the Acquisition, Taylor Morrison Holdings and Monarch Communities paid a one-time transaction fee of $13.7 million to the Principal Equityholders and also reimbursed the Principal Equityholders for third-party, out-of-pocket expenses incurred in connection with the Acquisition, including fees, expenses and disbursements of attorneys, accountants, consultants and other advisors. In addition, as compensation for ongoing services provided by affiliates of the Principal Equityholders under the management services agreements, Taylor Morrison Holdings and Monarch Communities agreed to pay to affiliates of the Principal Equityholders an annual aggregate management fee of $5.0 million. Immediately prior to the IPO, the management services agreements were terminated in exchange for an aggregate payment pursuant to the terms of such agreements of $29.8 million split equally between TPG and Oaktree.

 

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ITEM 1A. RISK FACTORS

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;

 

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

 

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

 

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

 

    federal and state 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 foreign buyers for our homes, which may fluctuate according to economic circumstances in foreign markets;

 

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

 

    real estate taxes; and

 

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

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 most recent economic downturn, unfavorable changes in many of the above factors negatively affected all of the markets we serve. Economic conditions in all our markets continue to be characterized by levels of uncertainty, which has impacted business or consumer confidence in those markets. For example, fluctuations in oil and gas prices may create economic uncertainty, particularly in regions of Texas where we have significant operations. Any deterioration in economic conditions or continuation of uncertain economic conditions would have a material adverse effect on our business.

In addition, a public health issue such as a major epidemic or pandemic could adversely affect economic conditions. The U.S. and other countries have experienced, and may experience in the future, outbreaks of contagious diseases that affect public perception of health risk. In the event of a widespread, prolonged, actual or perceived outbreak of a contagious disease, our operations could be negatively impacted by a reduction in customer traffic or other factors that could reduce demand for new homes.

Inclement weather, natural disasters (such as earthquakes, hurricanes, tornadoes, floods, droughts and fires), and other environmental conditions may delay the delivery of our homes and/or increase our costs. Civil unrest or acts of terrorism, or other acts of violence or threats to national security, may also have a negative 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 recent improvement in housing market conditions follows a significant downturn, and the likelihood of a full recovery is uncertain in the current state of the economy. A slowdown in our business could have additional adverse effects on our operating results and financial condition.

In connection with the most 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. Some markets and submarkets have been stronger than others. We expect that such unevenness will continue, whether or not the present housing recovery progresses and prevailing conditions in various housing markets and submarkets will continue to fluctuate. These fluctuations may be significant and unfavorable. In addition, while some of the many negative factors that contributed to the housing downturn may have moderated, several remain, and they could return and/or intensify to inhibit any future improvement in housing market conditions in 2015.

In addition, as a result of the recent disposition of our Canadian business, we are more exposed to economic conditions in the United States and are therefore less diversified than we were prior to the disposition. Consequently, our results of operations may be more volatile in the future than they have been historically.

Though we have taken steps to alleviate the impact of these conditions on our business, given the most recent downturn in the homebuilding industry 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.

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, due to various regulatory changes and lower risk appetite by lenders, with many lenders requiring increased levels of financial qualification, including lenders adhering to the new “Qualified Mortgage” requirements and ability to repay standard, and lending lower multiples of income. 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.

During the last several years, the mortgage lending industry 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. Lending requirements and standards remain tightened and as a result, investor demand for mortgage loans and mortgage-backed securities has declined. The liquidity provided by government sponsored entities, such as Fannie Mae, Freddie Mac, Ginnie Mae, the FHA and Veterans Administration, to the mortgage industry has been very important to the housing market. 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. For instance, in March 2014, a proposal was introduced in the U.S. Senate to overhaul the mortgage market by replacing Fannie Mae and Freddie Mac with a new system of federally insured mortgage securities. The proposal may not be enacted, and its effects on the residential mortgage market are not predictable at this time. Such an overhaul may reduce the availability of residential mortgage loans or increase the cost of such loans to borrowers, which could materially and adversely affect both our homebuilding and Mortgage Operations businesses.

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. 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

 

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availability or affordability of FHA financing, which could adversely affect our ability to sell homes in the U.S. In addition, changes in federal regulatory and fiscal policies relating to currently available benefits for homeowners (including a repeal of the currently available home mortgage interest tax deduction) may also negatively affect potential homebuyers’ ability to purchase homes.

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

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 and warranty/maintenance surety bonds or letters of credit to secure the completion of our construction contracts, development agreements and other arrangements. We have obtained credit facilities to provide the required volume of performance, payment and completion and warranty maintenance 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 and warranty/maintenance surety bonds and letters of credit primarily depends on our credit rating, capitalization, working capital, past performance, management expertise and certain external factors, including the capacity of the markets for such bonds. Performance, payment and completion and warranty/maintenance 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 or warranty/maintenance 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 and warranty/maintenance surety bonds or letters of credit from other sources when required, which could have a material adverse effect on our business, financial condition and results of operations.

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

Our backlog reflects sales contracts with our homebuyers for homes that have not yet been delivered. We have received a deposit from a homebuyer for each home reflected in our backlog, and generally we have the right, subject to certain exceptions, to retain the deposit if the homebuyer fails to comply with his or her obligations under the sales contract, including as a result of state and local law, the homebuyer’s inability to sell his or her current home or the homebuyer’s inability to make additional deposits required prior to the closing date. 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 and our remedies generally do not extend beyond the retention of deposits as our liquidated damages.

Cancellation rates may rise in the future. If uncertain economic conditions in the U.S. 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.

 

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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, replacing installed options, reducing the sales price or increasing incentives on the completed home for greater marketability and carrying higher inventory. Further, depending on the stage of cancellation, a contract that is cancelled at the end of a phase may cause additional construction costs, roadway repairs or added nuisances to existing homeowners for the out of sequence construction or modification of the one home. Significant numbers of cancellations could adversely affect our business, financial condition and results of operations.

The homebuilding and mortgage services industries are 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, affiliated or in-house services, raw materials and skilled management, volume discounts, local REALTOR® and labor resources. We also compete with the resale, or “previously owned,” home market. Increased competition could cause us to increase our selling incentives and reduce our prices. An oversupply of homes available for sale and the heavy discounting of home prices by some of our competitors have adversely affected demand for our homes and the results of our operations in the past and could do so again in the future. Our Mortgage Operations business competes with other mortgage lenders and title companies, including national, regional and local mortgage banks and other financial institutions, some of which are subject to fewer government regulations. Mortgage lenders who are subject to fewer regulations or have greater access to capital or different lending criteria may be able to offer more attractive financing to potential customers. If we are unable to compete effectively in our homebuilding and mortgage services markets, our business could decline disproportionately to our competitors, and our results of operations and financial condition could be adversely affected.

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 U.S., the unemployment rate was 5.7% as of January 2015, according to the U.S. Bureau of Labor Statistics (“BLS”). In addition, the labor force participation rate reported by the BLS has been declining, from 66.2% in January 2008 to 62.9% in January 2015, potentially reflecting an increased number of “discouraged workers” who have left the labor force. In addition, a substantial portion of new jobs created have been relatively low-wage jobs or part-time jobs. People who are not employed, are underemployed, who have left the labor force or are concerned about low wages or 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. 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 and state 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 could

 

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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 monetary policy could significantly increase the costs of owning a home, which in turn would adversely impact demand for and sales prices of homes and the ability of potential customers to obtain financing and adversely affect our business, financial condition and operating results.

Inflation or deflation could adversely affect our business and financial results.

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

Alternatively, a significant period of deflation could cause a decrease in overall spending and borrowing levels. This could lead to a further deterioration in economic conditions, including an increase in the rate of unemployment. Deflation could also cause the value of our inventories to decline or reduce the value of existing homes below the related mortgage loan balance, which could potentially increase the supply of existing homes and have a negative impact on our results of operations. Declining oil and gas prices may increase the risk of significant deflation 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.

Historically, a larger percentage of our agreements of sale 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 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 our operating results.

 

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

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

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

In 2005 and 2006, we discontinued requiring insurance policies from most of our contractors in California and instead adopted an Owner Controlled Insurance Plan (“OCIP”) for general liability exposures of most subcontractors (excluding consultants), 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.

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, inventory 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,

 

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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.

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.

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.

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 changes, 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 U.S. 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 2011. 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, 2012, 2013 or the year ended December 31, 2014. 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.

 

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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 and build our homes. 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 U.S.;

 

    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 are 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.

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 U.S. has resulted in the failure of some subcontractors’ businesses and may result in further failures. In addition, reduced levels of homebuilding in the U.S. 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.

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

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

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.

 

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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. 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 or other similar programs could exacerbate such risks.

Environmental regulations can also have an adverse impact on the availability and price of certain raw materials, such as lumber.

In addition, there is a variety of new legislation being enacted, or considered for enactment at the federal, state and local level relating to energy and climate change. This legislation relates to items such as carbon dioxide emissions control and building codes that impose energy efficiency standards. New building code requirements that impose stricter energy efficiency standards could significantly increase our cost to construct homes. As climate change concerns continue to grow, legislation and regulations of this nature are expected to continue and become more costly to comply with. Similarly, energy-related initiatives affect a wide variety of companies throughout the U.S. and the world and because our operations are heavily dependent on significant amounts of raw materials, such as lumber, steel, and concrete, they could have an indirect adverse impact on our operations and profitability to the extent the manufacturers and suppliers of our materials are burdened with expensive cap and trade and similar energy related regulations.

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

While we intend for the loans originated by TMHF, our Mortgage Operations business, to typically be held for no more than 20 days before being sold on the secondary market, if TMHF is 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 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 TMHF is extending. In addition, although mortgage lenders under the mortgage warehouse facilities TMHF currently uses to finance our lending operations normally purchase our mortgages within 20 days of origination, if such mortgage lenders default under these warehouse facilities TMHF would be required to fund the mortgages then in the pipeline. In such case, amounts available under our Restated Revolving Credit Facility (as defined below) and cash from operations may not be sufficient to allow TMHF to provide financing required by our business during these times.

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

 

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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 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. In January 2013, the Consumer Financial Protection Bureau proposed a number of new rules that became effective in January 2014, including but not limited to rules regarding the creation and definition of a “Qualified Mortgage”, rules for lender practices regarding assessing borrowers’ ability to repay, and limitations on certain fees and incentive arrangements. The effects of these rules upon their adoption could affect the availability and cost of mortgage credit. Other requirements provided for by the Dodd-Frank Act have not yet been finalized or implemented. The effect of such provisions on our Mortgage Operations business will depend on the rules that are ultimately enacted. Any such changes or new enactments could adversely affect our financial condition and results of operations and the market perception of our business.

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 or otherwise exit the market, TMHF may be required to increase the price of our products, or modify the range of products TMHF offers, 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 U.S. 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 and the timing and amount of future taxable income.

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

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

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

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

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

 

    severe weather;

 

    natural disasters;

 

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    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. The markets we operate in may also depend, to a degree, on certain sectors of the economy and any declines in those sectors may impact home sales and activities in that region. For example, to the extent the oil and gas industries, which can be very volatile, are negatively impacted by declining commodity prices, climate change, legislation or other factors, it could result in reduced employment, or other negative economic consequences, which in turn could adversely impact our home sales and activities, particularly in Texas.

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 related and 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. To the extent any of our joint ventures default on obligations secured by the assets of such joint venture, the assets could be forfeited to third-party lenders.

We have provided non-recourse carve-out guarantees to certain third-party lenders to our unconsolidated joint ventures (i.e. guarantees of losses suffered by the lender in the event that the borrowing entity or its equity owners engage in certain conduct, such as fraud, misappropriation of funds, unauthorized transfers of the financed property or equity interests in the borrowing entity, or the commencement of a voluntary bankruptcy case by the borrowing entity, or the borrowing entity violates environmental law, or hazardous materials are located on the property, or under other circumstances provided for in such guarantee or indemnity). In the future, we may provide other guarantees and indemnities to such lenders, including secured guarantees, in which case we may have increased liability in the event that a joint venture defaults on its obligations to a third party.

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. Furthermore, the termination of a joint venture may also give rise to lawsuits and legal costs.

Information technology failures and data security breaches could harm our business.

We use information technology and other computer resources to carry out important operational and marketing activities as well as maintain our business records, including information provided by our customers. Many of these resources are provided to us and/or maintained on our behalf by third-party service providers pursuant to agreements that specify certain security and service level standards. Our ability to conduct our business may be impaired if these resources are compromised, degraded, damaged or fail, whether due to a virus or other harmful circumstance, intentional penetration or disruption of our information technology resources by a third party, natural disaster, hardware or software corruption

 

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or failure or error (including a failure of security controls incorporated into or applied to such hardware or software), telecommunications system failure, service provider error or failure, intentional or unintentional personnel actions (including the failure to follow our security protocols), or lost connectivity to our networked resources. A significant and extended disruption in the functioning of these resources could damage our reputation and cause us to lose customers, sales and revenue.

In addition, breaches of our data security systems, including by cyber-attacks, could result in the unintended public disclosure or the misappropriation of proprietary, personal and confidential information (including confidential information about our employees, consumers who view our homes, homebuyers, mortgage loan borrowers and business partners), and require us to incur significant expense to address and resolve these kinds of issues. The release of confidential information may also lead to identity theft and related fraud, litigation or other proceedings against us by affected individuals and/or business partners and/or by regulators, and the outcome of such proceedings, which could include penalties or fines, could have a material and adverse effect on our business, financial condition and results of operations. In addition, the costs of maintaining adequate protection against such threats, as they develop in the future (or as legal requirements related to data security increase) could be material.

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.

For example, our recent disposition of Monarch requires the separation of our operations and personnel from those of Monarch, as well as our performance of the related transition services agreement. This creates additional expense and requires the allocation of management resources. We provided a customary indemnity to Monarch under the transition services agreement, which could create further expense. The disposition may result in decreased earnings, revenue or cash flow and may have a material adverse effect on our liquidity, which may materially and adversely affect our business, financial conditions and operating results. The disposition may also result in lost synergies that could negatively impact our balance sheet, income statement and cash flows.

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

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

 

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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. As of December 31, 2014, we had recorded a deficit of $10.2 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 attract customers, 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, storm water run-off, the presence of and exposure to asbestos, the handling of hazardous materials and the cleanup of contaminated sites. We may be liable for the costs of removal, investigation or remediation of hazardous or toxic substances located on, under or in a property currently or formerly owned, leased or occupied by us, whether or not we caused or knew of the pollution. The costs of any required removal, investigation or remediation of such substances or the costs of defending against environmental claims may be substantial. The presence of such substances, or the failure to remediate such substances properly, may also adversely affect our ability to sell the land or to borrow using the land as security. Environmental impacts from historical activities have been identified at some of the projects we have developed in the past and additional projects may be located on land that may have been contaminated by previous use. Although we are not aware of any projects requiring material remediation activities by us as a result of historical contamination, no assurances can be given that material claims or liabilities relating to such developments will not arise in the future.

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

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

As a homebuilding business with a wide variety of historic homebuilding and construction activities, we could be liable for future claims for damages as a result of the past or present use of hazardous materials, including building materials

 

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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 U.S., 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 U.S. 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.

We are involved in various litigation and legal claims in the normal course of our business operations, including actions brought on behalf of various classes of claimants. We are also subject to a variety of local, state, and federal laws and regulations related to land development activities, house construction standards, sales practices, mortgage lending operations, employment practices, and protection of the environment. As a result, we are subject to periodic examination or inquiry by various governmental agencies that administer these laws and regulations.

We establish liabilities for legal claims and regulatory matters when such matters are both probable of occurring and any potential loss is reasonably estimable. We accrue for such matters based on the facts and circumstances specific to each matter and revise these estimates as the matters evolve. In such cases, there may exist an exposure to loss in excess of any amounts currently accrued. In view of the inherent difficulty of predicting the outcome of these legal and regulatory matters, we generally cannot predict the ultimate resolution of the pending matters, the related timing, or the eventual loss. While the outcome of such contingencies cannot be predicted with certainty, we do not believe that the resolution of such matters will have a material adverse impact on our results of operations, financial position, or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter exceeds the estimates reflected in the recorded reserves relating to such matter, we could incur additional charges that could be significant.

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. 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

 

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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.

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. 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.

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 Restated Revolving Credit Facility and other credit facilities. 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. If the size or availability of our banking facilities is reduced in the future, or if we are unable to renew existing facilities in the future on favorable terms, it would have an adverse effect on our liquidity and operations.

As of December 31, 2014, we had $252.3 million of debt maturing in the next 12 months. We believe we can meet this and 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, 2014, the total principal amount of our debt (including $160.8 million of indebtedness of TMHF) was $1.7 billion. 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 any capital markets offerings for the payment of interest on our debt and reducing our ability to use our cash flows 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 Restated 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 indentures governing our 2020 Senior Notes, our 2021 Senior Notes and the agreements governing our Restated Revolving Credit Facility and other indebtedness may restrict our ability to pursue our business strategies.

The indentures governing our 2020 Senior Notes, our 2021 Senior Notes (as defined below) and the agreement governing our Restated 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 restrictions on distributions, transfers or dividends 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 agreement governing the Restated Revolving Credit Facility contains certain “springing” financial covenants requiring TMM Holdings and its subsidiaries to comply with a certain maximum capitalization ratio and a certain minimum consolidated tangible net worth test. The agreement governing the Restated Revolving Credit Facility also contains customary restrictive covenants, including limitations on incurrence of liens, the payment of dividends and other distributions, the making of asset dispositions, investments, sale and leasebacks, and limitations on debt payments and amendments. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources in this Annual Report.

The restrictions contained in the indentures governing all of our Senior Notes and the agreement governing our Restated 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.

A breach of any of the restrictive covenants under the agreements governing our Restated Revolving Credit Facility or any of our Senior Notes could allow for the acceleration of both the Restated Revolving Credit Facility and the Senior Notes. If the indebtedness under our Restated Revolving Credit Facility or 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 Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources in this Annual Report.

 

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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 2014, 2013 and 2012 we made expenditures for land and development of $1.0 billion, $897.1 million and $656.9 million, respectively.

During the next 12 months, we expect to meet our cash requirements with existing cash and cash equivalents, cash flow from operations (including sales of our homes and land), proceeds from the disposition of Monarch and borrowings under our Restated 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 indebtedness, 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 commercially reasonable terms, if at all. Any inability to generate sufficient cash flow, refinance our indebtedness or incur additional indebtedness on commercially reasonable 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 is its interest in TMM Holdings II Limited Partnership (“New TMM”), and accordingly it is 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 Holdings and its operating subsidiaries.

TMHC is a holding company and has no assets other than its ownership, directly or indirectly, of New TMM Units. TMHC has 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 Holdings and its subsidiaries. Because the operations of TMHC’s business are conducted through subsidiaries of TMM Holdings, 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 agreements governing the Restated Revolving Credit Facility, certain of the Senior Notes and other debt agreements governing current and future 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.

The Principal Equityholders, via the TPG and Oaktree Holding Vehicles, 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 the Company and subsidiaries;

 

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    agree to sell or otherwise transfer a controlling stake in the 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 the Company and may make some transactions more difficult or impossible without the support of our Principal Equityholders, even if such events are perceived by the other stockholders as being in their best interest. The concentration of voting power among our Principal Equityholders may have an adverse effect on the price of our Class A Common Stock. The 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, to which TMHC is a party, along with the TPG and Oaktree Holding Vehicles and JH, certain of our actions 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 our IPO (and the application of net proceeds therefrom), 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 our IPO (and the application of net proceeds therefrom), 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 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.

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 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 contains 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.

 

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As a “controlled company” within the meaning of the corporate governance rules of the New York Stock Exchange, we qualify for, and 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.

We are 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. 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 is held by the TPG and Oaktree Holding Vehicles. As a controlled company, we are entitled to elect, and have elected, 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 committees’ purposes and responsibilities and perform an annual evaluation of such committees. Accordingly, holders of our Class A Common Stock do 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 the Company.

The majority of TMHC’s directors are affiliated with the Principal Equityholders. These persons have fiduciary duties to TMHC and in addition have duties to the Principal Equityholders. In addition, TMHC’s amended and restated certificate of incorporation provides 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.

Failure to maintain effective internal control over financial reporting could have an adverse effect on our business, operating results and the trading price of our securities.

As a public company we are required to document and test our internal control procedures to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules of the SEC, which require, among other things, our management to assess annually the effectiveness of our internal control over financial reporting and our independent registered public accounting firm to issue a report on our internal control over financial reporting. If our management is unable to certify the effectiveness of our internal controls or if our independent registered public accounting firm cannot render an opinion on management’s assessment and on the effectiveness of our internal control over financial reporting, or if material weaknesses in our internal controls are identified, it could lead to material misstatements in our financial statements, we may be unable to meet our disclosure obligations and investors could lose confidence in our reported financial information. 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.

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, our amended and restated certificate of incorporation and our bylaws contain certain provisions that may discourage, delay or prevent

 

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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;

 

    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 contains 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.

Under our Restated 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 Restated Revolving Credit Facility. Under the indentures governing our Senior Notes, if a change of control were to occur, we would be required to make offers to repurchase the Senior Notes at prices equal to 101% of their respective principal amounts. These change of control provisions in our existing debt agreements may also delay or diminish the value of an acquisition by a third party.

Any of the above risks could have a material adverse effect on your investment in our Class A Common Stock and Senior Notes.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2. PROPERTIES

We lease office facilities for our homebuilding and mortgage operations. We lease our corporate headquarters, which is located in Scottsdale, Arizona. The lease on this facility covers a space of approximately 24,000 square feet and expires in June 2018. We lease approximately 12 other properties for our other division offices and design centers. For information on land owned and controlled by us for use in our homebuilding activities, please refer to Item 1 — Business — Homebuilding Operations — Land Acquisition Policies and Development.

 

ITEM 3. LEGAL PROCEEDINGS

We are involved in various litigation and legal claims in the normal course of our business operations, including actions brought on behalf of various classes of claimants. We are also subject to a variety of local, state, and federal laws and regulations related to land development activities, house construction standards, sales practices, mortgage lending operations, employment practices, and protection of the environment. As a result, we are subject to periodic examination or inquiry by various governmental agencies that administer these laws and regulations. We establish liabilities for legal claims and regulatory matters when such matters are both probable of occurring and any potential loss is reasonably estimable. We accrue for such matters based on the facts and circumstances specific to each matter and revise these estimates as the matters evolve. In such cases, there may exist an exposure to loss in excess of any amounts currently accrued. In view of the inherent difficulty of predicting the outcome of these legal and regulatory matters, we generally cannot predict the ultimate resolution of the pending matters, the related timing, or the eventual loss. While the outcome of such contingencies cannot be predicted with certainty, we do not believe that the resolution of such matters will have a material adverse impact on our results of operations, financial position, or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter exceeds the estimates reflected in the recorded reserves relating to such matter, we could incur additional charges that could be significant.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY

Market Information

The Company lists its Class A Common Stock on the New York Stock Exchange (NYSE) under the symbol “TMHC”. On February 27, 2015 the Company had one holder of record of our Class A Common Stock. The following table sets forth for the quarters indicated the range of high and low trading for the Company’s common stock during fiscal year ended:

 

     Year Ended December 31, 2014  
     1st Quarter      2nd Quarter      3rd Quarter      4th Quarter  

High

     26.09       $ 24.13       $ 22.81       $ 19.89   

Low

     19.67         20.04         16.22         15.13   

 

     Year Ended December 31, 2013  
     1st Quarter      2nd Quarter      3rd Quarter      4th Quarter  

High

     N/A       $ 26.89       $ 25.89       $ 23.40   

Low

     N/A         23.04         19.96         20.02   

The Company’s Class B Common Stock is not listed on a securities exchange. On February 27, 2015 the Company had 38 holders of our Class B Common Stock. For details on the Class B Common Stock see Note 13 — Stockholders’ Equity — Reorganization Transactions in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report.

 

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Stock Performance Graph

The following shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any of our other filings under the Exchange Act or the Securities Act, except to the extent we specifically incorporate it by reference into such filing.

This chart compares the cumulative total return on our common stock with that of the Standard & Poor’s 500 Composite Stock Index (the “S&P 500”) and the Standard & Poor’s Homebuilding Index (the “S&P Homebuilding”). The chart assumes $100.00 was invested at the close of market on April 10, 2013, the date of our IPO, in the Class A common stock of Taylor Morrison Home Corporation, the S&P 500 Index and the S&P Homebuilding Index, and assumes the reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.

Comparison of Cumulative Total Return Among TMHC, the S&P 500 and the S&P Homebuilding from April 10, 2013 to December 31, 2014

 

LOGO

 

     4/10/13      6/30/13      9/30/13      12/31/13      3/31/14      6/30/14      9/30/14      12/31/14  

TMHC

   $ 100.00       $ 105.82       $ 98.31       $ 97.44       $ 102.00       $ 97.31       $ 70.40       $ 81.99   

S&P 500

     100.00         101.17         105.91         116.42         117.93         123.46         124.22         129.68   

S&P Homebuilding

     100.00         99.92         103.96         113.15         110.64         111.36         100.67         116.13   

Dividends

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 Item 7 — 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 the covenants governing our Restated Revolving Credit Facility and certain of our Senior Notes that limit our ability to pay dividends to stockholders and other factors the Board of Directors of TMHC deem relevant. For further information, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital Resources — 2020 Senior Notes, — 2021 Senior Notes and — Revolving Credit Facility.

Issuer Purchases of Equity Securities

None.

 

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ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth selected consolidated financial and operating data at and for each of the five fiscal years ending December 31, 2014. It should be read in conjunction with the Consolidated Financial Statements and Notes thereto, listed in Item 8 of this Annual Report and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Annual Report.

 

    TMHC     Predecessor (1)  
    Year Ended December 31,     July 13 to
December 31,
2011
    January 1
to July 12,
2011
    Year Ended
December 31,
2010
 
    2014     2013     2012        

(Dollars in thousands, except per share amounts)

           
 

Statements of Operations Data:

           

Total revenues

  $ 2,708,432      $ 1,916,081      $ 1,041,182      $ 409,442      $ 341,452      $ 722,740   

Gross margin

  $ 566,246      $ 415,865      $ 206,641      $ 76,234      $ 63,923      $ 132,009   

Income tax provision (benefit)

  $ 76,395      $ (23,810   $ (284,298   $ (12,005   $ 4,229      $ (40,240

Net income from continuing operations

  $ 225,599      $ 28,355      $ 355,955      $ 707      $ 7,670      $ 7,769   

Income from discontinued operations – net of tax

  $ 41,902      $ 66,513      $ 74,893      $ 26,060      $ 42,350      $ 82,833   

Net income before allocation to non-controlling interests

  $ 267,501      $ 94,868      $ 430,848      $ 26,767      $ 50,020      $ 90,602   

Net (income) loss attributable to non-controlling interests – joint ventures

  $ (1,648   $ 131      $ (28   $ (1,178   $ (4,122   $ (3,235
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before non-controlling interests – Principal Equityholders

  $ 265,853      $ 94,999      $ 430,820      $ 25,589      $ 45,898      $ 87,367   

Net (income) loss from continuing operations attributable to non-controlling interests – Principal Equityholders

  $ (163,790   $ 1,442      $ (355,927   $ 471      $ (3,548   $ (4,534

Net income from discontinued operations attributable to non-controlling interests – Principal Equityholders (2)

  $ (30,594   $ (51,021   $ (74,893     (26,060 )   $ (42,350 )   $ (82,833 )
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to Taylor Morrison Home Corporation

  $ 71,469      $ 45,420      $ —       $ —       $ —       $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share:

           

Basic

           

Income from continuing operations

  $ 1.83      $ 0.91        N/A        N/A        N/A        N/A   

Discontinued operations – net of tax (2)

  $ 0.34      $ 0.47        N/A        N/A        N/A        N/A   
 

 

 

   

 

 

         

Net income available to Taylor Morrison Home Corporation

  $ 2.17      $ 1.38        N/A        N/A        N/A        N/A   

Diluted

           

Income from continuing operations

  $ 1.83      $ 0.91        N/A        N/A        N/A        N/A   

Discontinued operations – net of tax (2)

  $ 0.34      $ 0.47        N/A        N/A        N/A        N/A   
 

 

 

   

 

 

         

Net income available to Taylor Morrison Home Corporation

  $ 2.17      $ 1.38        N/A        N/A        N/A        N/A   

Weighted average number of shares of common stock:

           

Basic

    32,937        32,840        N/A        N/A        N/A        N/A   

Diluted

    122,313        122,319        N/A        N/A        N/A        N/A   

 

(1) The selected financial data as of and for the year ended December 31, 2010 and for the period from January 1, 2011 to July 12, 2011 have been derived from the financial statements of our predecessor, Taylor Woodrow Holdings (USA), Inc., now known as Taylor Morrison Communities, Inc. 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.
(2) See Notes 1 and 4 to Notes to the Consolidated Financial Statements for information regarding our disposition of Monarch and our treatment of that segment as discontinued operations.

 

     As of December 31,  
     2014      2013      2012      2011      2010  

Balance Sheet Data (at period end):

              

Cash and cash equivalents, excluding restricted cash

   $ 234,217       $ 193,518       $ 111,083       $ 103,367       $ 42,322   

Real estate inventory

     2,518,321         2,012,580         1,366,902         794,881         798,030   

Total assets

     4,133,113         3,438,558         2,738,056         1,671,067         1,527,324   

Total debt

     1,737,106         1,257,730         969,499         568,967         567,202   

Total stockholders’ equity

     1,777,161         1,544,901         1,204,575         628,565         465,529   

Operating Data (for the period ended):

              

Average active selling communities

     206         158         108         120         127   

Net sales orders (units)

     5,728         5,018         3,738         2,564         2,319   

Home closings (units)

     5,642         4,716         2,933         2,327         2,570   

Average sales price of homes delivered

   $ 464       $ 394       $ 336       $ 306       $ 274   

Backlog at the end of period (value)

   $ 1,099,767       $ 987,754       $ 716,033       $ 259,391       $ 170,503   

Backlog at the end of period (units)

     2,252         2,166         1,864         740         503   

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

Our principal business is residential homebuilding and the development of lifestyle communities with operations geographically focused in Arizona, California, Colorado, Florida, and Texas. Our homes appeal to entry-level, move-up, 55+ and luxury homebuyers, with a focus on move-up customers in high-growth markets. Our homebuilding company operates under our Taylor Morrison and Darling Homes brand names. Our business is organized into ten homebuilding operating divisions, and a mortgage division, which are managed as three reportable segments: East, West and Mortgage Operations, as follows:

 

East Houston (which includes a Taylor Morrison division and a Darling Homes division), Austin, Dallas, North Florida and West Florida
West Phoenix, Northern California, Southern California and Denver
Mortgage Operations Mortgage and Financial Services (TMHF)

We offer single family attached and/or detached homes and revenue is recognized when the homes are completed and delivered to the buyers. Our primary costs are the acquisition of land in various stages of development and the construction costs of the homes we sell.

Our Mortgage Operations reportable segment provides financial services to customers in the United States through our wholly owned mortgage subsidiary, TMHF. Revenues from loan origination are recognized at the time the related real estate transactions are completed, usually upon the close of escrow.

On January 28, 2015, we completed the sale of our Monarch business for total proceeds of approximately CAD $570 million. Through this strategic sale, we were able to capture what we believe was an attractive valuation for this asset at a time when market dynamics are changing. By exiting the Canadian business, we will focus solely on U.S. operations, where we believe we can reinvest proceeds from the sale of Monarch in new and existing markets to generate higher returns to maximize shareholder value.

Industry Overview and Current Market Developments

We believe that a fundamental housing recovery is still underway on a national basis, driven by consumers who are increasingly optimistic about their economic prospects, and we believe the recovery is supported by certain positive economic and demographic factors, including decreasing unemployment, increasing home values, improving household balance sheets, declines in new and existing for-sale home inventory and low interest rates supporting affordability and home ownership. While we were encouraged by certain positive and improved trends during 2014, several challenges still exist that may impact the speed of the recovery, such as lingering unemployment concerns, stagnation in real wages and real or perceived personal wealth, national and global economic uncertainty and a continuing restrictive mortgage lending environment. We are additionally challenged by shortages in the labor supply, specifically as it relates to qualified tradespeople. Nevertheless, we believe we are in an upward business cycle in most of our markets as the ability to deliver homes to prospective buyers still lags behind demand and the availability of new and pre-owned homes remains constrained.

Land Acquisition and Development

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. We believe land supply provides us with the opportunity to increase community count prospectively. We also currently own or have an option to purchase the majority of the land on which we expect to close homes during 2015. During the next twelve months we expect to open communities in geographic markets in line with consumer demand.

 

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Our approach in allocating capital and managing our land portfolio has been to acquire assets that have 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 capital.

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. From time to time, we may sell land in our communities if we believe it is best for our overall operations. We do not expect such sales to have a significant effect on our overall results, but they may impact our overall gross margins.

We will continue to identify the preferences of our customer and demographic groups and offer them innovative, high-quality homes that are efficient and profitable to build. To achieve this goal, we conduct 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.

2014 Highlights

Key financial results as of and for the year ended December 31, 2014 are as follows:

 

    U.S. community count increased 30% to 206 average communities from 158 year-over-year

 

    Net sales orders in the U.S. increased 14% to 5,728

 

    U.S. average monthly absorption pace was 2.3 compared to 2.6 in the prior year

 

    U.S. cancellations as a percentage of gross sales orders was 13.2% compared to 14.3% in the prior year

 

    Home closings in our U.S. operations increased 20% to 5,642

 

    Average prices of homes closed in the U.S. increased 18% to $464,000

 

    Mortgage Operations reported gross profit of $16 million on revenue of $35 million

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 Annual Report. The primary factor that affects the comparability of our results operations is the disposal of our Monarch business. For all periods presented, the results and assets and liabilities of Monarch are included in discontinued operations. In addition to the impact of the matters discussed in the Risk Factors listed in Item 1A of this Annual Report, our future results could differ materially from our historical results due to the disposition of our Monarch business in early 2015, our IPO in 2013 and the acquisition of Darling in 2012.

Non-GAAP Measures

In addition to the results reported in accordance with accounting principles generally accepted in the United States (“GAAP”), we have provided information in this Annual Report relating to “adjusted home closings gross margins.”

Adjusted home closings gross margins

We calculate adjusted home closings gross margin from U.S. GAAP gross margin by adding impairment charges, if any, attributable to the write-down of communities, and the amortization of capitalized interest through cost of home closings. We evaluate adjusted home closings gross margin, which is calculated by adding back to home closings gross

 

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margin the capitalized interest amortization related to the homes closed. Management uses adjusted home closings gross margin to evaluate our operational and economic performance on a consolidated basis as well as the operational and economic performance of our segments. We believe adjusted home closings gross margin is relevant and useful to investors for evaluating our overall financial performance. This measure is considered a non-GAAP financial measure and should be considered in addition to, rather than as a substitute for, the comparable U.S. GAAP financial measure as a measure of our operating performance. Although other companies in the homebuilding industry report similar information, the methods used may differ. We urge investors to understand the methods used by other companies in the homebuilding industry to calculate gross margins and any adjustments to such amounts before comparing our measures to those of such other companies.

Critical Accounting Policies

General

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions, impacting our reported results of operations and financial condition.

Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of assets and liabilities and the recognition of income and expenses. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. The significant accounting policies that management believes are the most critical to aid in fully understanding and evaluating our reported financial results are critical accounting policies and are described below.

Revenue Recognition

Home Closings Revenue, net

Home closings revenue is recorded using the completed-contract method of accounting at the time each home is closed, delivered, title and possession are transferred to the buyer, we have no significant continuing involvement with the home, risk of loss has transferred, and the buyer has demonstrated sufficient initial and continuing investment in the property. A home is considered closed when escrow closes and funds have transferred from the buyer or mortgage company to us.

We typically grant our homebuyers certain sales incentives, including cash discounts, incentives on options included in the home, option upgrades, and seller-paid financing or closing costs. Incentives and discounts are accounted for as a reduction in the sales price of the home, and home closings revenue is shown net of discounts. We also receive rebates from certain vendors and these rebates are accounted for as a reduction to cost of home closings.

Land Closings Revenue

Land closings revenue is recognized when title is transferred to the buyer, we have no significant continuing involvement, and the buyer has demonstrated sufficient initial and continuing investment in the property sold. If the buyer has not made an adequate initial or continuing investment in the property, the profit on such sale is deferred until these conditions are met.

Mortgage Operations Revenue

Loan origination revenue (including title fees, points, closing costs) is recognized at the time the related real estate transactions are completed, usually upon the close of escrow. All of the loans TMHF originates are sold to third party investors within a short period of time, within than 20 business days, on a non-recourse basis. Since TMHF does not have continuing involvement with the transferred assets, we derecognize the mortgage loans at the time of sale, based on the difference between the selling price and carrying value of the related loans upon sale, recording a gain/loss on sale.

 

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Real Estate Inventory Valuation and Costing

Inventory consists of land, land under development, homes under construction, completed homes, and model homes, which are stated at cost. In addition to direct carrying costs, we also capitalize interest, real estate taxes, and related development costs that benefit the entire community, such as field construction supervision and related direct overhead. Home construction costs are accumulated and charged to cost of sales at home closing using the specific identification method. Land acquisition, development, interest, real estate taxes and overhead are allocated to homes and units using methods that approximate the relative sales value method. These costs are capitalized to inventory from the point development begins to the point construction is completed. Changes in estimated costs to be incurred in a community are generally allocated to the remaining homes on a prospective basis. For those communities that have been temporarily closed or development has been discontinued, we do not allocate interest or other costs to the community’s inventory until activity resumes.

We assess the recoverability of our land inventory in accordance with the provisions of ASC Topic 360, “Property, Plant, and Equipment.” We review our real estate inventory for indicators of impairment by community during each reporting period. If indicators of impairment are present for a community, we first perform an undiscounted cash flow analysis to determine if the carrying value of the assets in that community exceeds the undiscounted cash flows. If the carrying value of the assets exceeds their estimated undiscounted cash flows, then the assets are deemed to be impaired and are recorded at fair value as of the assessment date. These cash flows are significantly impacted by various estimates of sales prices, construction costs, sales pace, and other factors. The discount rate used in determining each asset’s fair value depends on the community’s projected life and development stage.

When an impairment charge for a community is determined, the charge is then allocated to each lot in the community in the same manner as land and development costs are allocated to each lot. Inventory within each community is categorized as construction in progress and finished homes, residential land and lots developed and under development, or land held for development, based on the stage of production or plans for future development.

Our estimate of undiscounted cash flows from these communities may change with market conditions and could result in a need to record impairment charges to adjust the carrying value of these assets to their estimated fair value. Several factors could lead to changes in the estimates of undiscounted future cash flows for a given community. The most significant of these include pricing and incentive levels actually realized in the community, the rate at which the homes are sold and changes in the costs incurred to develop lots and construct homes. Pricing and incentive levels are often interrelated with sales pace within a community, and price reductions generally lead to an increase in sales pace. Further, both of these factors are heavily influenced by the competitive pressures facing a given community from both new homes and existing homes, some of which may result from foreclosures. If conditions worsen in the broader economy, the homebuilding industry or specific markets in which we operate, and as we re-evaluate specific community pricing and incentives, construction and development plans and our overall land sale strategies, we may be required to evaluate additional communities or re-evaluate previously impaired communities for potential impairment. For assets that are currently “mothballed” (i.e., strategic long-term land positions not currently under development or subject to an active selling effort), assumptions are based on current development plans and current price pace and house costs of similar communities. These evaluations may result in additional impairment charges.

The life cycle of a community generally ranges from three to five years, commencing with the acquisition of unentitled or entitled land, continuing through the land development phase and concluding with the sale, construction and delivery of homes. Actual community lives will vary based on the size of the community, the sales absorption rate and whether we purchased the property as raw land or as finished lots.

We capitalize certain interest costs to inventory during the development and construction periods. Capitalized interest is charged to cost of sales when the related inventory is delivered or when the related inventory is charged to cost of sales.

Insurance Costs, Self-Insurance Reserves and Warranty Reserves

We have certain deductible amounts under our workers’ compensation, automobile and general liability insurance policies, and we record expense and liabilities for the estimated costs of potential claims for construction defects. We also generally require our sub-contractors and design professionals to indemnify us for liabilities arising from their work, subject to certain limitations. We are the parent of Beneva, which provides insurance coverage for construction defects discovered during a period of time up to ten years following the sale of a home, coverage for premise operations risk,

 

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and property coverage. We accrue for the expected costs associated with the deductibles and self-insured amounts under our various insurance policies based on historical claims, estimates for claims incurred but not reported, and potential for recovery of costs from insurance and other sources. The estimates are subject to significant variability due to various factors, such as claim settlement patterns, litigation trends and the length of time in which a construction defect claim might be made after the closing of a home.

We offer warranties on homes that generally provide for a limited one-year warranty to cover various defects in workmanship or materials or to cover structural construction defects. We may also facilitate a longer warranty in certain markets or to comply with regulatory requirements. Warranty reserves are recorded as each home closes in an amount estimated to be adequate to cover expected future costs of materials and outside labor during warranty periods. Our warranty is not considered a separate deliverable in each sale arrangement, so it is accounted for in accordance with ASC Topic 450, “Contingencies.” In accordance with ASC 450, warranties that are not separately priced are generally accounted for by accruing the estimated costs to fulfill the warranty obligation. Thus, the warranty would not be considered a separate deliverable in the arrangement since it is not priced apart from the home. As a result, we accrue the estimated costs to fulfill the warranty obligation in accordance with ASC 450 at the time a home closes, as a component of cost of home closings.

Our reserves are based on factors that include an actuarial study for historical and anticipated claims, trends related to similar product types, number of home closings, and geographical areas. We also provide third-party warranty coverage on homes where required by Federal Housing Administration or Veterans Administration lenders.

We regularly review the reasonableness and adequacy of our reserves and make adjustments to the balance of the preexisting reserves to reflect changes in trends and historical data as information becomes available. Self-insurance and warranty reserves are included in accrued expenses and other liabilities in the accompanying Consolidated Balance Sheets.

Investments in Unconsolidated Entities and Variable Interest Entities (VIEs)

We are involved in joint ventures with related and unrelated third parties for homebuilding activities. We use the equity method of accounting for entities over which we exercise significant influence but do not have a controlling interest over the operating and financial policies of the investee. For unconsolidated entities in which we function as the managing member, we have evaluated the rights held by our joint venture partners and determined that they have substantive participating rights that preclude the presumption of control. For joint ventures accounted for using the equity method, our share of net earnings or losses is included in equity in income of unconsolidated entities when earned and distributions are credited against its investment in the joint venture when received. These joint ventures are recorded in investments in unconsolidated entities on the Consolidated Balance Sheets.

In the ordinary course of business, we enter into land and lot option purchase contracts in order to procure land or lots for the construction of homes. Lot option contracts enable us to control significant lot positions with a minimal initial capital investment and substantially reduce the risks associated with land ownership and development. In accordance with ASC Topic 810, “Consolidation,” we have concluded that when we enter into an option or purchase agreement to acquire land or lots and pay a non-refundable deposit, a VIE may be created because we are deemed to have provided subordinated financial support that will absorb some or all of an entity’s expected losses if they occur. If we are the primary beneficiary of the VIE, we will consolidate the VIE in our Consolidated Financial Statements and reflect such assets and liabilities as real estate not owned under option agreements within our inventory balance in the accompanying Consolidated Balance Sheets.

Stock Based Compensation

We account for stock-based compensation in accordance with ASC Topic 718-10, “Compensation — Stock Compensation.” The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model. These models require the input of highly subjective assumptions. This guidance also requires us to estimate forfeitures in calculating the expense related to stock-based compensation.

 

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Valuation of Deferred Tax Assets

We account for income taxes using the asset and liability method, which requires that deferred tax assets and liabilities be recognized based on future tax consequences of both temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted.

In accordance with ASC Topic 740-10, “Income Taxes,” we evaluate our deferred tax assets by tax jurisdiction, including the benefit from net operating loss (“NOL”) carryforwards by tax jurisdiction, to determine if a valuation allowance is required. Companies must assess, using significant judgments, whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard with significant weight being given to evidence that can be objectively verified. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the length of statutory carryforward periods, experience with operating losses and experience of utilizing tax credit carryforwards and tax planning alternatives.

Results of Operations

The following table sets forth our results of operations:

 

(Dollars in thousands)    Year Ended December 31,  
     2014     2013     2012  

Statements of Operations Data:

      

Home closings revenue, net

   $ 2,619,558      $ 1,857,950      $ 986,198   

Land closings revenue

     53,381        27,760        33,123   

Mortgage operations revenue

     35,493        30,371        21,861   
  

 

 

   

 

 

   

 

 

 

Total revenues

$ 2,708,432    $ 1,916,081    $ 1,041,182   

Cost of home closings

  2,082,819      1,457,454      795,979   

Cost of land closings

  39,696      26,316      27,296   

Mortgage operations expenses

  19,671      16,446      11,266   
  

 

 

   

 

 

   

 

 

 

Gross margin

$ 566,246    $ 415,865    $ 206,641   

Sales, commissions and other marketing costs

  168,897      127,419      70,398   

General and administrative expenses

  81,153      77,198      41,867   

Equity in income of unconsolidated entities

  (5,405   (2,895   (1,214

Interest expense (income), net

  1,160      842      (758

Other expense, net

  18,447      2,842      3,704   

Loss on extinguishment of debt

  —       10,141     7,953   

Indemnification and transaction expenses

  —       195,773      13,034   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

$ 301,944    $ 4,545    $ 71,657   

Income tax provision (benefit)

  76,395      (23,810   (284,298
  

 

 

   

 

 

   

 

 

 

Net income from continuing operations

$ 225,599    $ 28,355    $ 355,955   

Income from discontinued operations – net of tax

  41,902      66,513      74,893   
  

 

 

   

 

 

   

 

 

 

Net income before allocation to non-controlling interests

$ 267,501    $ 94,868    $ 430,848   

Net (income) loss attributable to non-controlling interests – joint ventures

  (1,648   131      (28
  

 

 

   

 

 

   

 

 

 

Net income before non-controlling interests – Principal Equityholders

$ 265,853    $ 94,999    $ 430,820   

Net (income) loss from continuing operations attributable to non-controlling interests – Principal Equityholders

  (163,790   1,442      (355,927

Net income from discontinued operations attributable to non-controlling interests – Principal Equityholders

  (30,594   (51,021   (74,893 )
  

 

 

   

 

 

   

 

 

 

Net income available to Taylor Morrison Home Corporation

$ 71,469    $ 45,420    $ —    
  

 

 

   

 

 

   

 

 

 

Gross margin as a % of revenue from home closings

  21.6   22.4   21.0

Adjusted home closings gross margin

  23.0   23.4   21.2

Sales, commissions and other marketing costs as a % of revenue from home closings

  6.4   6.9   7.1

General and administrative expenses as a % of revenue from home closings

  3.1   4.2   4.2

Average sales price per home closed

$ 464    $ 394    $ 336   

 

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Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Average Active Selling Communities

 

     Year Ended December 31,  
     2014      2013      Change  

East

     151         121         24.8

West

     55         37         48.6   
  

 

 

    

 

 

    

Total

  206      158      30.4
  

 

 

    

 

 

    

Consolidated:

Average active selling communities increased 30.4%, primarily due to significant additions in our West Florida and Phoenix divisions. We opened new communities and completed existing communities throughout all of our markets during 2014. We open communities when we believe we have the greatest probability of capitalizing on favorable market conditions in which the community is located.

East:

The number of average active selling communities in the East segment increased, primarily due to the opening of 28 new communities in West Florida. Sales pace in the East segment decreased to 2.1 homes per month per community for the year ended December 31, 2014 from 2.2 homes per month per community in the prior year period. Timing of community openings and our continued efforts to increase sales prices and margins in order to maximize returns in our communities were the main reasons for the decrease in sales pace for the year ended December 31, 2014.

West:

The number of average active selling communities in the West segment increased due to 19 new community openings in our Phoenix division and 17 new community openings in our Northern California division.

Net Sales Orders

 

     Year Ended December 31, (1)  
(Dollars in thousands )    Net Homes Sold     Sales Value     Average Selling Price  
     2014      2013      Change     2014      2013      Change     2014      2013      Change  

East

     3,743         3,255         15.0   $ 1,544,996       $ 1,266,461         22.0   $ 413       $ 389         6.2

West

     1,985         1,763         12.6        1,060,129         839,764         26.2        534         476         12.2   
  

 

 

    

 

 

      

 

 

    

 

 

            

Total

  5,728      5,018      14.1 $ 2,605,125    $ 2,106,225      23.7 $ 455    $ 420      8.3
  

 

 

    

 

 

      

 

 

    

 

 

            

 

(1)  Net sales orders represent the number and dollar value of new sales contracts executed with customers.

Consolidated:

The increase in the value of sales orders, average selling prices and the number of net homes sold in 2014 compared to 2013 was driven by consumer demand, prompting an increase in active selling communities. Consumer demand increased as a result of historically low interest rates and stabilizing macroeconomic conditions relative to the prior comparable period.

East:

The number of net homes sold increased as a result of the timing and quality of our new community openings. Due to continued improvement throughout the East segment markets in 2014, we increased the average selling price of net homes sold in the East segment by 6.2% to $413,000, resulting in an increase in sales value of net homes sold of 22.0%.

 

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In particular, our homebuilding divisions in Houston and West Florida have benefited from these factors, resulting in an increase in the number of units sold and related revenue from the year ended December 31, 2014 over the prior comparable period.

West:

Net sales orders increased both in units and in sales value in 2014 compared to 2013 due to an increase in average active selling outlets. We increased the average selling price of net homes sold in the West segment by 12.2% to $534,000, resulting in an increase in sales value of net homes sold of 26.2% in 2014. Sales pace in the West segment decreased to 3.0 homes per month per community for the year ended December 31, 2014 from 4.0 homes per month per community in the 2013 period. The decrease in sales pace for the current period is primarily due to the Phoenix division, where our pace declined year over year to 2.3 from 3.9 and the Denver division, where our pace declined to 2.2 from 2.8. We actively manage the availability of product and timing of releases in order to help us achieve our profitability metrics and not sacrifice profitability for volume. We continue to see strong demand in our California markets. Average selling price increased year over year due to the introduction of higher end product in Southern California and Phoenix.

Sales Order Cancellations—Units

 

     Year Ended December 31,  
     Cancelled Sales Orders      Cancellation Rate (1)  
     2014      2013      2014     2013  

East

     519         533         12.2     14.1

West

     354         306         15.1        14.8   
  

 

 

    

 

 

      

Total/weighted average

  873      839      13.2   14.3
  

 

 

    

 

 

      

 

(1)  Cancellation rate represents the number of cancelled sales orders divided by gross sales orders.

We believe a favorable financing market, our use of prequalification criteria through TMHF and increased earnest money deposits help us maintain a low cancellation rate. Our overall cancellation rate decreased from 2013 to 2014. The decrease in the cancellation rate from 2013 to 2014 was most notably related to higher deposit requirements year over year throughout our Texas divisions, primarily in new communities and/or new phases within existing communities.

Sales Order Backlog

 

     As of December 31,  
(Dollars in thousands)    Sold Homes in Backlog (1)     Sales Value     Average Selling Price  
     2014      2013      Change     2014      2013      Change     2014      2013      Change  

East

     1,709         1,544         10.7   $ 806,848       $ 667,725         20.8   $ 472       $ 432         9.3

West

     543         622         (12.7     292,919         320,029         (8.5     539         515         4.7   
  

 

 

    

 

 

      

 

 

    

 

 

            

Total

  2,252      2,166      4.0   1,099,767      987,754      11.3 $ 488    $ 456      7.0
  

 

 

    

 

 

      

 

 

    

 

 

            

 

(1)  Sales order backlog represents homes under contract for which revenue has not yet been recognized at the end of the period (including homes sold but not yet started). Some of the contracts in our sales order backlog are subject to contingencies including mortgage loan approval and buyers selling their existing homes, which can result in cancellations.

Consolidated:

Backlog value and units increased as a result of an increase in average sales price and increase in net sales orders.

East:

In the East segment, backlog value increased as a result of price appreciation, maximizing lot premiums, controlled lot releases in certain communities and a product mix change to homes with a higher sales value. The East increase in backlog is consistent with our increases in homes sold and new community openings year over year.

 

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West:

Backlog units and dollars decreased year over year due to a decline in sales pace. Backlog in Phoenix is down year over year due to a decline in sales pace from 2013 as a result of moderating growth. Backlog in Southern California decreased year over year due to an increase in average selling prices which have slower selling paces than lower priced product.

Home Closings Revenue

 

     Year Ended December 31,  
(Dollars in thousands)    Homes Closed     Sales Value (1)     Average Selling Price  
     2014      2013      Change     2014      2013      Change     2014      2013      Change  

East

     3,578         2,913         22.8   $ 1,504,141       $ 1,094,578         37.4   $ 420       $ 376         11.7

West

     2,064         1,803         14.5        1,115,417         763,372         46.1        540         423         27.7   
  

 

 

    

 

 

      

 

 

    

 

 

            

Total

  5,642      4,716      19.6 $ 2,619,558    $ 1,857,950      41.0 $ 464    $ 394      17.8
  

 

 

    

 

 

      

 

 

    

 

 

            

 

(1)  Home closings revenue represents homes where possession has transferred to the buyer.

Consolidated:

For the year ended December 31, 2014 compared to 2013, there was an increase in the number of homes closed, the sales value of homes closed and average selling price.

East:

The number of homes closed increased as a result of the increase in homes sold during the same period, which was partially attributable to the volume of new community openings. Due to continued improvement throughout the East segment markets in 2014, we were able to increase the average selling price of homes closed in the East segment by 11.7% to $420,000, resulting in an increase in sales value of homes closed of 37.4%. This increase is a result of a combination of product mix and price appreciation. These market improvements, as well as favorable homebuyer reception of communities opened subsequent to December 31, 2013, contributed to closing revenue increases. In particular, homes closed in 2014 in our West Florida, Houston and Dallas markets surpassed that in the prior year period by a significant amount, driving both units and dollars higher as consumer demand for move-up product benefited our communities in these markets. Overall, the improvement in East segment home closings revenue and sales value has been due primarily to our well-located land positions, an increase in active selling communities and our consumer-driven offerings. Management in the region continues to maximize sales prices where possible through market-driven product offerings as market conditions allow.

West:

The sales value of homes closed increased by 46.1%, driven by an increase in average selling price. Homes closed in 2014 in our Northern and Southern California markets surpassed those in the prior year period by a significant amount, driving both units and dollars higher as consumer demand for move-up product benefited our communities in these markets. In the segment as a whole, we were able to increase our average selling price of homes closed by 27.7%, to $540,000 in the year ended December 31, 2014, driven primarily by a shift to more move up and higher priced product. We continue to optimize sales prices where possible through market-driven product offerings as market conditions allow.

Land Closings Revenue

 

     Year Ended December 31,  
(In thousands)    2014      2013      Change  

East

   $ 52,456       $ 22,720         130.9

West

     925         5,040         (81.6
  

 

 

    

 

 

    

Total

$ 53,381    $ 27,760      92.3
  

 

 

    

 

 

    

 

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Since we generally do not purchase land for future sales, land and lot sales occur at various intervals and varying degrees of profitability depending on the need for such property in our business strategy. Therefore, the revenue and gross margin from land closings will fluctuate from period to period.

Segment Home Closings Gross Margins

The following table sets forth a reconciliation between our home closings segment gross margins and our corresponding segment adjusted home closings gross margins. See — Non-GAAP Measures — Adjusted home closings gross margins.

 

    East     West     Total  
    For the Year Ended December,  
(Dollars in thousands)   2014     2013     2014     2013     2014     2013  

Home Closings

           

Home closings revenue

  $ 1,504,141      $ 1,094,578      $ 1,115,417      $ 763,372      $ 2,619,558      $ 1,857,950   

Cost of home closings

    1,176,288        867,053        906,531        590,401        2,082,819        1,457,454   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Home closings gross margin

  327,853      227,525      208,886      172,971      536,739      400,496   

Capitalized interest amortization

  28,495      15,310      36,603      18,837      65,098      34,147   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted home closings gross margin

$ 356,348    $ 242,835    $ 245,489    $ 191,808    $ 601,837    $ 434,643   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Home closings gross margin %

  21.8   20.8   18.7   22.7   20.5   21.6

Adjusted home closings gross margin %

  23.7   22.2   22.0   25.1   23.0   23.4

Consolidated:

Our consolidated 2014 adjusted home closings gross margin percentage, decreased slightly compared to 2013. Product mix continues to impact margin, as an increase in sales in our California divisions generated significantly higher home closings gross margin dollars per home but lower margin rate. We are also experiencing higher land and development costs as we close homes related to legacy holdings. The legacy holdings have lower carrying costs and as a result home closings gross margin percentage is decreasing as those legacy holdings are at a reduced proportion of our overall mix.

East:

We experienced increases in home closings gross margin and adjusted home closings gross margin dollars and rates in our Dallas, Houston (Taylor Morrison and Darling), West Florida and North Florida markets. The recovery and stabilization of the West Florida market has generated sustained customer demand in the Tampa and Ft. Myers areas, which has allowed us to leverage a low cost basis land supply and home price increases to achieve higher margins.

West:

The home closings gross margin percentage and adjusted home closings gross margin percentage decreased in 2014 compared to 2013 primarily due to an increase in the percentage of homes closed in California versus Phoenix where the margin rate is lower though margin dollars are significantly higher. In addition, the impact of increased land acquisition pricing and increases in commodity and labor pricing for self-developed lots over the past few years continued to pressure margin rates in 2014.

 

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Mortgage Operations

Our Mortgage Operations segment provides mortgage lending through our subsidiary, TMHF. The following is a summary of mortgage operations gross margin:

 

     Year Ended
December 31,
 
(In thousands)    2014     2013  

Mortgage operations revenue

   $ 35,493      $ 30,371   

Mortgage operations expense

     19,671        16,446   
  

 

 

   

 

 

 

Mortgage operations gross margin

$ 15,822    $ 13,925   
  

 

 

   

 

 

 

Mortgage operations margin %

  44.6   45.8

Our Mortgage Operations segment’s revenue increased due primarily to increased closings volume and average loan amounts, while gross margin percentage decreased period over period due to increases in underwriting costs.

The following details the number of loans closed, the aggregate value and capture rate on our loans for the last two years:

 

     TMHF
Closed
Loans
     Aggregate
Loan Volume
(in millions)
     Capture
Rate
 

December 31, 2014

     3,312       $ 1,097.7         74

December 31, 2013

     2,828         850.8         78   

Our mortgage capture rate represents the percentage of our homes sold to a home purchaser that utilized a mortgage, for which the borrower obtained such mortgage from TMHF or one of our preferred third party lenders. Our capture rate decreased in 2014 as a result of the lagging effects of transitioning our Darling operations to TMHF from their legacy mortgage provider. In 2014 and 2013, the average FICO score of customers who obtained mortgages through TMHF was 742 and 739, respectively.

Sales, Commissions and Other Marketing Costs

As a percentage of home closings revenue, sales commissions and other marketing costs decreased to 6.4% in 2014 from 6.9% in 2013. For the year ended December 31, 2014 and 2013, sales, commissions, and other marketing costs such as advertising and sales office expenses were $168.9 million and $127.4 million, respectively, which is a 32.6% increase year over year. This increase in dollars reflects a 19.6% increase in homes closed as well as an increase in average selling price.

General and Administrative Expenses

General and administrative expenses decreased to 3.1% as a percentage of home closings revenue for the year ended December 31, 2014, compared to 4.2% in 2013. For the year ended December 31, 2014, general and administrative expenses were $81.2 million as compared to $77.2 million in the same period in 2013, which represents a 5.1% increase in dollars. Our growth in home closings revenue during the period reduced our general and administrative percentage as we were able to utilize our scalable platform, leveraging existing infrastructure across increased revenue.

Equity in Income of Unconsolidated Entities

Equity in income of unconsolidated entities was $5.4 million for the year ended December 31, 2014 compared to $2.9 million for the year ended December 31, 2013. The increase year over year is primarily attributable to two new unconsolidated joint ventures located in our Southern California division.

 

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Interest Expense (Income), net

Interest expense represents interest incurred, but not capitalized, on our long-term debt and other borrowings. Interest expense was consistent year over year in relation to our levels of borrowings and qualifying assets.

Other Expense, net

Other expense, net for the year ended December 31, 2014 was $18.4 million compared to $2.8 million for the year ended December 31, 2013. The primary reason for the increase is the increase in the current year accrual for contingent payments related to the Darling acquisition in December 2012 (the “Darling Acquisition”). This expense also consists of mothball community expense, pre-acquisition costs on unpursued land projects, captive insurance claims costs and financing fees on our revolving credit facility.

Income Tax Provision

Our effective tax rate for the year ended December 31, 2014 and 2013 was composed of the federal statutory tax rate in the U.S. and was affected primarily by state income taxes, the recognition of previously unrecognized tax benefits, the establishment of uncertain tax positions, and interest relating to uncertain tax positions. In addition, the IPO and the Reorganization Transactions resulted in a higher effective tax rate for the year ended December 31, 2013 due to certain non-deductible charges related to modification of the Class J Units of TMM Holdings.

During the year ended December 31, 2013, we accepted a settlement offer related to Taylor Woodrow Holdings (USA) Inc. for the 2008 and 2009 tax years. As a result, $102.0 million of our previously unrecognized indemnified tax positions including interest and penalties were recognized during the year ended December 31, 2013.

As of December 31, 2014, our cumulative gross unrecognized tax benefits were $2.4 million in the U.S. and all unrecognized tax benefits, if recognized, would affect the effective tax rate. As of December 31, 2013, our cumulative gross unrecognized tax benefits were $2.1 million in the U.S. These amounts are included in income taxes payable in the accompanying Consolidated Balance Sheets at December 31, 2014 and December 31, 2013. None of the unrecognized tax benefits are expected to reverse in the next 12 months.

The unrecognized tax benefits for discontinued operations were $6.2 million and $7.9 million as of December 31, 2014 and 2013, respectively.

For further information, see Note 12 — Income Taxes in the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report.

Income from Discontinued Operations, net of tax

Income from discontinued operations decreased from $66.5 million at December 31, 2013 to $41.9 million at December 31, 2014. The number of average active selling communities in the year ended December 31, 2014, including unconsolidated joint ventures, decreased by three from the prior year due to the closing of one wholly owned and two joint venture high-rise buildings during the latter half of 2013. The closeout of towers during 2013 caused the product mix of our unconsolidated joint ventures to shift to our low-rise product, accounting for a 264 unit decrease in units closed during the year ended December 31, 2014 as compared to 2013.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Average Active Selling Communities

 

     Year Ended December 31,  
     2013      2012      Change  

East

     121         75         61.3

West

     37         33         12.1   
  

 

 

    

 

 

    

Total

  158      108      46.3
  

 

 

    

 

 

    

 

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Average active selling communities increased 46.3% from the year ended December 31, 2012 to the year ended December 31, 2013 with the largest increase in the East segment, primarily due to the addition of 43 Darling Homes communities. We opened new communities and completed existing communities throughout all of our markets during 2013, with the largest number of additions in our West Florida, Phoenix and Houston divisions, where demand and our land positions afforded us the opportunity. We open communities when we believe we have the greatest probability of capitalizing on favorable market conditions in which the community is located.

Net Sales Orders

 

     Year Ended December 31, (1)  
(Dollars in thousands )    Net Homes Sold     Sales Value     Average Selling Price  
     2013      2012      Change     2013      2012      Change     2013      2012      Change  

East

     3,255         2,077         56.7   $ 1,266,461       $ 692,287         82.9   $ 389       $ 333         16.7

West

     1,763         1,661         6.1        839,764         612,428         37.1        476         369         29.2   
  

 

 

    

 

 

      

 

 

    

 

 

            

Total

  5,018      3,738      34.2 $ 2,106,225    $ 1,304,715      61.4 $ 420    $ 349      20.3
  

 

 

    

 

 

      

 

 

    

 

 

            

 

(1)  Net sales orders represent the number and dollar value of new sales contracts executed with customers. Other sales are recognized after a contract is signed and the rescission period has ended.

Both the value of net sales orders and the number of net homes sold increased in the year ended December 31, 2013, compared to the year ended December 31, 2012. These results were driven by the continued strong demand in the spring selling season in 2013, during which we benefited from higher selling prices as consumers in the market gained confidence in the values present in the marketplace, historically low interest rates and improved macroeconomic conditions. The improved homebuilding market significantly impacted areas such as Phoenix, West Florida and Northern California resulting in an increase in the number of units sold and related revenue for the year ended December 31, 2013 over the prior year comparable period.

Sales Order Cancellations—Units

 

     Year Ended December 31,  
     Cancelled Sales Orders      Cancellation Rate(1)  
     2013      2012      2013     2012  

East

     533         363         14.1     14.9

West

     306         243         14.8        12.8   
  

 

 

    

 

 

      

Total/weighted average.

  839      606      14.3   14.0
  

 

 

    

 

 

      

 

(1)  Cancellation rate represents the number of cancelled sales orders divided by gross sales orders.

The number of our sales order cancellations increased due to increases in sales volume in the year ended December 31, 2013 compared to the year ended December 31, 2012. Our continued scrutiny of potential buyers, consumer-friendly lending markets, use of prequalification strategies, as well as our increased deposit amounts, help us maintain a low cancellation rate.

 

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Sales Order Backlog

 

     As of December 31,  
(Dollars in thousands)    Sold Homes in Backlog (1)     Sales Value     Average Selling Price  
     2013      2012      Change     2013      2012      Change     2013      2012      Change  

East

     1,544         1,202         28.5   $ 667,725       $ 474,086         40.8   $ 432       $ 394         9.6

West

     622         662         (6.0     320,029         241,947         32.3        515         365         40.8   
  

 

 

    

 

 

      

 

 

    

 

 

            

Total

  2,166      1,864      16.2 $ 987,754    $ 716,033      37.9 $ 456    $ 384      18.7
  

 

 

    

 

 

      

 

 

    

 

 

            

 

(1)  Sales order backlog represents homes under contract for which revenue has not yet been recognized at the end of the period including homes sold but not yet started). Some of the contracts in our sales order backlog are subject to contingencies including mortgage loan approval and buyers selling their existing homes, which can result in cancellations.

Our homes in backlog at December 31, 2013 increased from December 31, 2012, due to the December 2012 acquisition of Darling Homes in our East segment, which added units to backlog.

Home Closings Revenue

 

     Year Ended December 31,  
(Dollars in thousands)    Homes Closed     Sales Value (1)     Average Selling Price  
     2013      2012      Change     2013      2012      Change     2013      2012      Change  

East

     2,913         1,661         75.4   $ 1,094,578       $ 529,686         106.6   $ 376       $ 319         17.8

West

     1,803         1,272         41.7        763,372         456,512         67.2        423         359         18.0   
  

 

 

    

 

 

      

 

 

    

 

 

            

Total

  4,716      2,933      60.8 $ 1,857,950    $ 986,198      88.4 $ 394    $ 336      17.2
  

 

 

    

 

 

      

 

 

    

 

 

            

 

(1)  Home closings revenue represents homes where possession has transferred to the buyer.

Home closings revenue increased in the year ended December 31, 2013 compared to the year ended December 31, 2012. The average selling price of homes closed during the year ended December 31, 2013 increased compared to the year ended December 31, 2012. Sales backlog converted in our Phoenix, Houston and West Florida markets, as well as with the Darling Acquisition, surpassed prior periods by significant amounts driving both units and revenue dollars higher.

Land Closings Revenue

 

     Year Ended December 31,  
(In thousands)    2013      2012      Change  

East

   $ 22,720       $ 28,837         (21.2 )% 

West

     5,040         4,286         17.6   
  

 

 

    

 

 

    

Total

$ 27,760    $ 33,123      (16.2 )% 
  

 

 

    

 

 

    

Since we generally do not purchase land for future sale, land and lot sales occur at various intervals and varying degrees of profitability depending on the need for such property in our business strategy. Therefore, the revenue and gross margin from land closings will fluctuate from period to period.

 

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Segment Home Closings Gross Margins

The following table sets forth a reconciliation between our home closings segment gross margins and our corresponding segment adjusted home closings gross margins. See — Non-GAAP Measures — Adjusted home closings gross margins.

 

     East     West     Total  
     For the Year Ended December,  
(Dollars in thousands)    2013     2012     2013     2012     2013     2012  

Home Closings

            

Home closings revenue

   $ 1,094,578      $ 529,686      $ 763,372      $ 456,512      $ 1,857,950      $ 986,198   

Cost of home closings

     867,053        421,204        590,401        374,775        1,457,454        795,979   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Home closings gross margin

  227,525      108,482      172,971      81,737      400,496      190,219   

Capitalized interest amortization

  15,310      9,409      18,837      9,474      34,147      18,883   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted home closings gross margin

$ 242,835    $ 117,891    $ 191,808    $ 91,211    $ 434,643    $ 209,102   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Home closings gross margin %

  20.8   20.5   22.7   17.9   21.6   19.3

Adjusted home closings gross margin %

  22.2   22.3   25.1   20.0   23.4   21.2

Consolidated:

Our home closings gross margin increased in the year ended December 31, 2013 compared to the year ended December 31, 2012. The increase in home closings gross margin percentage in the year ended December 31, 2013 was primarily due to a shift to higher margin product mix across our U.S. markets, particularly in the Northern California, Austin and Phoenix markets, where our move-up and luxury homes produced higher margins in the improving markets. Consumer demand in these areas allowed continued price increases and we were able to achieve higher margins than in the prior year period. Our price increases generally exceed construction and land price increases in our markets in 2013. The increase in adjusted home closings gross margin percentage was primarily due to our increased margins in the aforementioned markets.

East:

For the year ended December 31, 2013, the acquisition of Darling Homes and its integration into our operations accounted for a significant portion of the increases in our East segment home closings revenue, home closings gross margin and adjusted home closings gross margin. During the year ended December 31, 2013, home closings revenue in the East segment was $1.1 billion, an increase of 106.6% compared to the year ended December 31, 2012. The increase was driven by an increase in home closings of 75.4% to 2,913 homes, compared to 1,661 homes in the prior year. The continued improvement throughout the East markets, as well as favorable homebuyer demand for communities opened in prior periods also contributed to closing revenue increases. The East segment had an average monthly sales pace of 2.2 homes per community in the year ended December 31, 2013, which is consistent with the year ended December 31, 2012. Average home closings sales price in the East segment increased 17.8% to $376,000, from $319,000 in the prior year from a combination of price appreciation and product mix. The average sales order price also increased by $56,000, or 16.7% as management in this segment reduced customer incentives and other promotions, and increased sales prices as market conditions allowed. Backlog sales value in the East segment increased 40.8% in the year ended December 31, 2013 over the prior year due to a 28.5% increase in backlog units and a 9.6% increase in the average sales price of backlog homes. The increase in backlog units was due primarily to the addition of Darling in December 2012. Overall, the improvement in East segment home closings revenue, sales prices and sales pace has been due primarily to our well-located land positions, an increase in active selling communities and our consumer-driven offerings.

During the year ended December 31, 2013, home closings gross margin for the East segment was 20.8%, up 30 basis points from 20.5% for the year ended December 31, 2012. East segment adjusted home closings gross margin was 22.2% in the year ended December 31, 2013 consistent with 22.3% for the same period in 2012. We recorded purchase accounting adjustments on the assets acquired in the Darling Acquisition that reduced home closings gross margin percentage in earlier quarters that were offset eventually by sales price increases. Our Austin and North Florida divisions recorded the largest increases in home closings gross margin percentage, but all divisions recorded some levels of increase. The recovery and improved stabilization of the West Florida market in 2013, which had tended to generate

 

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lower home closings margins, began when sustained consumer demand returned in the Tampa and Ft. Myers areas of Florida, and we were able to leverage land with a low cost basis and produce homes at a higher price point than in the prior year. The Austin and Houston markets improved from the prior year, as we were able to increase prices on our move-up offerings and maintain stable land and construction costs.

West:

Home closings revenue in the West segment increased by $306.9 million in the year ended December 31, 2013 compared to the prior year. The 67.2% increase in home closings revenue was due to an 18.0% increase in average home closing selling price and a 41.7% increase in the number of homes closed. The availability of product and timing of releases within communities provided saleable inventory that was well-received by consumers. The average sales per community per month for the years ending December 31, 2013 and 2012 were 3.9 and 4.2, respectively. The average home closing selling price increased 18.0%, to $423,000 in the year ended December 31, 2013 compared to $359,000 in the prior year. Overall, during the year ended December 31, 2013, revenues improved in the West segment compared to the same period in 2012 primarily due to housing market recoveries and advances in the Phoenix and Northern California divisions. In 2013 we continued to see strong demand in these markets and systematically released product into the marketplace to capture and maintain increased operating margins, as evidenced by the 40.8% year-over-year increase in average sales price of our backlog homes. Backlog units in the West segment at December 31, 2013 decreased 6% from 2012, although total backlog sales value increased 32.3% due to the average sales price increase noted above.

During the year ended December 31, 2013, home closings gross margin for the West segment was 22.7%, up from 17.9% for the year ended December 31, 2012. Adjusted home closings gross margin in the West segment increased by 510 basis points in the year ended December 31, 2013, compared to the year ended December 31, 2012. The increase in home closings gross margin and adjusted home closings gross margin was primarily due to our ability to control our construction costs, while increasing our average home closing selling price by 18.0% in 2013 compared to 2012. All divisions increased gross margin percentage during the period. The Northern California and Phoenix divisions experienced the highest percentage of price increases during the year and also were able to contain construction costs as the volume of construction within our communities in those markets allowed us to effectively manage cost pressures on construction materials and labor.

Mortgage Operations

Our Mortgage Operations segment, which provides mortgage lending through TMHF, is highly dependent on our sales and closings volumes. The following is a summary of mortgage operations gross margin:

 

(In thousands)    Year Ended December 31,  
         2013                 2012        

Mortgage operations

   $ 30,371      $ 21,861   

Mortgage operations expense

     16,446        11,266   
  

 

 

   

 

 

 

Mortgage operations gross margin

$ 13,925    $ 10,595   
  

 

 

   

 

 

 

Mortgage operations margin %

  45.8   48.5

Our Mortgage Operations segment’s revenue increased in the year ended December 31, 2013 compared to the year ended December 31, 2012, due primarily to increased closings volume and average loan amounts. The decrease in gross margin percentage was due primarily to increases in mortgage underwriting costs driven by increased staffing for compliance initiatives as well as increased costs to integrate Darling.

 

     TMHF
Closed
Loans
     Aggregate
Loan Volume
(in millions)
     Capture
Rate
 

December 31, 2013

     2,828       $ 850.8         78

December 31, 2012

     2,022         535.2         84   

Our capture rate decreased in 2013 as we transitioned our Darling Homes operations from a legacy provider to TMHF. In 2013 and 2012 the average FICO score of customers who obtained mortgages through TMHF was 739 and 738, respectively.

 

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Sales, Commissions and Other Marketing Costs

For the year ended December 31, 2013 and 2012, sales, commissions, and other marketing costs such as advertising and sales office expenses were $127.4 million and $70.4 million, respectively, which is an 81.0% increase year over year. This increase reflects a 60.8% increase in homes closed as well as an increase in average selling price. As a percentage of home sales revenue, sales commissions and other marketing costs decreased to 6.9% from 7.1% for the year ended December 31, 2013 and 2012 respectively. An increase in external commissions paid and a higher selling cost structure at Darling, added to the dollar increase year over year as consumers leveraged outside professionals more prominently than in the prior period.

General and Administrative Expenses

For the year ended December 31, 2013, general and administrative expenses were $77.2 million as compared to $41.9 million in the same period in 2012, which represents an 84.4% increase. General and administrative expenses were 4.0% as a percentage of total revenue in both the years ended December 31, 2013 and 2012 due to our diligent cost containment strategy as we pursued synergies within the business. We were also able to leverage our existing infrastructure while increasing closings by 60.8%. We recorded $2.9 million of expense for the options and restricted stock units granted in connection with our IPO and grants under our equity compensation plan during the remainder of 2013. There were no comparable amounts in 2012.

Equity in Income of Unconsolidated Entities

Equity in income of unconsolidated entities was $2.9 million for the year ended December 31, 2013 compared to $1.2 million for the year ended December 31, 2012. The increase was due to the addition of joint ventures in our East segment in the year ended December 31, 2013.

Interest Expense (Income), net

Interest expense represents interest incurred, but not capitalized, on our long-term debt and other borrowings. Purchase accounting from the Acquisition eliminated the accumulated capitalized interest on the balance sheet as of the Acquisition date. Interest expense (income), net for the years ending December 31, 2013 and 2012, was $842 thousand of expense and $758 thousand of income, respectively.

Other Expense, net

Other expense, net for the year ended December 31, 2013 was $2.8 million of expense compared to $3.7 million of expense in the year ended December 31, 2012. Other expense is primarily related to mothball community expense, pre-acquisition costs on un-pursued land projects and captive insurance claims costs.

Loss on Extinguishment of Debt

During 2012, we prepaid $350.0 million of the Sponsor Loan with proceeds from the 2020 Senior Notes issued in April 2012. The remaining $150.0 million of the Sponsor Loan was exchanged for equity interests. The amount of the Sponsor Loan that was retired had been borrowed at a discount of 2.5% and, consequently, the $7.9 million of unamortized portion of the discount was written off during 2012 to expense. See Item 1 — Business — 2011 Acquisition by our Principal Equityholders of this Annual Report.

On April 12, 2013, we used $204.3 million of the net proceeds of the IPO to redeem $189.6 million aggregate principal amount of 2020 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). We wrote off $4.6 million of unamortized issuance costs, expensed $1.8 million of original issue premium and incurred a call premium of $7.3 million related to the redemption. These costs are included in the $10.1 million loss on extinguishment of debt in the accompanying Consolidated Statements of Operations for the year ended December 31, 2013.

 

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Indemnification and Transaction Expense

The Predecessor Parent Company indemnified TMM Holdings for specific uncertain tax positions existing as of the date of the Acquisition. An indemnification receivable of $129.7 million was recorded at the time of the Acquisition. The indemnification receivable included a periodic increase for accrued interest, penalties, and additional identified tax issues covered by the indemnity, offset by periodic decreases as uncertain tax matters and related tax obligations are resolved. The receivable due from the Predecessor Parent Company for the indemnification was valued at the same amount as the estimated income tax liability. During the year ended December 31, 2013 and 2012, $88.5 million and $12.3 million of the indemnification receivable was written off due to successful settlement of tax positions that were subject to the Predecessor Parent Company indemnification. The uncertain tax position was reversed simultaneously in our tax provision during each period.

During the year ended December 31, 2013, we also incurred $29.8 million of expense related to the termination of the management services agreements between us and the Principal Equityholders as part of the Reorganization Transactions. Additionally, we incurred $80.2 million of non-cash stock compensation expense for the modification of the TMM Holdings Class J Units which were exchanged for units in the TPG and Oaktree Holding Vehicles. The change was related to the termination of the JHI Services Agreement. See Item 1 — Business — Reorganization and Initial Public Offering of this Annual Report.

Income Tax Provision

Our effective tax rate for the year ended December 31, 2013 and 2012 was composed of the federal statutory tax rates in the U.S. and was affected primarily by state income taxes, the recognition of previously unrecognized tax benefits, the establishment of uncertain tax positions, and interest relating to uncertain tax positions. In addition, the IPO and Reorganization Transactions also resulted in an increase to our effective tax rate for the year ended December 31, 2013 due to certain non-deductible charges related to modification of the Class J Units of TMM Holdings. See Item 1 — Business — Reorganization and Initial Public Offering of this Annual Report.

During the year ended December 31, 2013, we accepted a settlement offer related to Taylor Woodrow Holdings (USA) Inc. for the 2008 and 2009 tax years. As a result, $102.0 million of our previously unrecognized indemnified tax positions including interest and penalties were recognized during the year ended December 31, 2013.

As of December 31, 2013, our cumulative gross unrecognized tax benefits were $2.1 million in the U.S. and all unrecognized tax benefits, if recognized, would affect the effective tax rate. As of December 31, 2012, our cumulative gross unrecognized tax benefits were $85.7 million in the U.S. These amounts are included in income taxes payable in the accompanying Consolidated Balance Sheets at December 31, 2013 and December 31, 2012.

The unrecognized tax benefits for discontinued operations were $7.9 million and $9.8 million for the years ended December 31, 2013 and 2012, respectively.

For further information, see Note 12 — Income Taxes in the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report.

Income from Discontinued Operations, net of tax

Income from discontinued operations decreased from $74.9 million at December 31, 2012 to $66.5 million at December 31, 2013. The activity in discontinued operations in 2013 was affected by the timing of high-rise closings. In the year ended December 31, 2012 we began closing one joint venture tower, Nautilus, which had 382 of 389 units close in the period, accounting for more than $8.1 million in joint venture income, while in 2013, we recognized $27.0 million of joint venture income on 862 of 879 units from closings at the joint venture high-rise buildings Couture and Encore. During the year ended December 31, 2013 we closed 422 of 423 units in the wholly owned tower Ultra, which produced $104.3 million of revenue in discontinued operations. The average home closings sales price was 19.0% lower for the year ended December 31, 2013 when compared to 2012. This decrease was due to a product mix shift into move-up communities located in affordable areas of the greater Toronto area during 2013 and a shift in mix between single-family and high-rise units. Overall, income from discontinued operations decreased as a result of increased costs related to home closings activity.

 

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Liquidity and Capital Resources

Liquidity

We finance our operations through the following:

 

    Borrowings under our Restated Revolving Credit Facility

 

    Our various series of Senior Notes (described below)

 

    Mortgage warehouse facilities

 

    Project-level financing (including non-recourse loans)

 

    Performance, payment and completion surety bonds, and letters of credit

We believe that we can fund our current and foreseeable liquidity needs for the next 12 months from:

 

    Cash generated from operations

 

    Borrowings under our Restated Revolving Credit Facility

 

    Cash generated from the sale of our Monarch business

We may access the capital markets to obtain additional liquidity through debt and equity offerings on an opportunistic basis.

Our principal uses of capital in the year ended December 31, 2014 and 2013 were land purchases, lot development, home construction, operating expenses, payment of debt service, income taxes, investments in joint ventures and the payment of various liabilities. During the 2013 period we made significant payments and incurred significant expenses in connection with our Reorganization Transactions and IPO. Cash flows for each of our communities depend on the status of the development cycle, and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, plats, site development, construction of model homes, general landscaping and other amenities. Because these costs are a component of our inventory and are not recognized in our statement of operations until a home closes, we incur significant cash outflows prior to recognition of earnings.

We have a defined strategy for cash management, particularly with respect to cash outlays for land and inventory development. We used $133.7 million of cash in operating activities for the year ended December 31, 2014 and $151.9 million in the same period in 2013. Our principal cash uses in 2014 were real estate inventory acquisitions, construction and taxes. We generated the cash used in 2014 through our operating activities, borrowings under our credit facilities and the issuance of the 2024 Senior Notes.

Depending upon future homebuilding market conditions and our expectations for these conditions, we may use a portion of our cash and cash equivalents to take advantage of land opportunities. We intend to maintain adequate liquidity and balance sheet strength, and we will continue to evaluate opportunities to access the debt and equity capital markets as they are available.

Capital Resources

Cash and Cash Equivalents

As of December 31, 2014, we had available cash and cash equivalents of $234.2 million from continuing operations. Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions and short-term, highly liquid investments. We consider all highly liquid investments with original maturities of 90 days or less, such as certificates of deposit, money market funds, and commercial paper, to be cash equivalents. Cash accounts are insured up to $250,000 in the U.S. by the Federal Deposit Insurance Corporation and up to $100,000 in Canada by the Canadian Deposit Insurance Company.

As a result of the sale of our Canadian operations, which occurred in January 2015, our total cash and cash equivalents as of December 31, 2014 was $463.5 million. This amount includes USD cash from the Canadian operations, which is included in Assets of discontinued operations in the accompanying Consolidated Balance Sheet.

 

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Outstanding indebtedness related to the Monarch business (including indebtedness outstanding under various revolving facilities) is reflected as liabilities of discontinued operations in the accompanying Consolidated Balance Sheets.

Senior Notes:

The following table summarizes our outstanding senior unsecured notes (collectively, the “Senior Notes”), as of December 31, 2014.

 

(Dollars in thousands)    Date Issued    Principal
Amount
     Initial Offering
Price
    Interest
Rate
    Net Proceeds      Original Debt
Issuance
Cost
 

Senior Notes due 2020

   April 13, 2012    $ 395,505         100.0     7.750   $ 537,400       $ 12,600   

Senior Notes due 2020

   August 21, 2012      93,335        105.5     7.750     132,500         3,100   

Senior Notes due 2021

   April 16, 2013      550,000         100.0     5.250     541,700         8,300   

Senior Notes due 2024

   March 5, 2014      350,000         100.0     5.625     345,300         4,700   
     

 

 

        

 

 

    

 

 

 

Total

$ 1,388,840    $ 1,556,900    $ 28,700   
     

 

 

        

 

 

    

 

 

 

2020 Senior Notes

On April 13, 2012, we issued $550.0 million of 7.75% Senior Notes due 2020 (the “Initial Notes”) at an initial offering price of 100% of the principal amount (the “Offering”). The net proceeds from the sale of the Initial Notes were used, in part, to repay existing indebtedness. The remaining proceeds of approximately $187.4 million from the Offering were used for general corporate purposes. An additional $3.0 million of issuance costs were settled outside the bond proceeds.

On August 21, 2012, we issued an additional $125.0 million of 7.75% Senior Notes due 2020 (the “Additional Notes” together with the Initial Notes, the “2020 Senior Notes”) at an initial offering price of 105.5% of the principal amount. The net proceeds were used for general corporate purposes. The Additional Notes issued August 21, 2012 were issued pursuant to the existing indenture for the 2020 Senior Notes. The 2020 Senior Notes are unsecured and not subject to registration rights.

On April 12, 2013, we used $204.3 million of the net proceeds of the IPO to acquire New TMM Units from New TMM (at a price equal to the price paid by the underwriters for shares of Class A Common Stock in the IPO). TMM Holdings used these proceeds to repay a portion of the 2020 Senior Notes.

Obligations to pay principal and interest on the 2020 Senior Notes are guaranteed by TMM Holdings, Taylor Morrison Holdings, Inc., Monarch Parent Inc. and the U.S. homebuilding subsidiaries of TMC (collectively, the “Guarantors”). The 2020 Senior Notes and the guarantees are senior unsecured obligations. The indenture for the 2020 Senior Notes contains covenants that limit (i) the making of investments, (ii) the payment of dividends and the redemption of equity and junior debt, (iii) the incurrence of additional indebtedness, (iv) asset dispositions, (v) mergers and similar corporate transactions, (vi) the incurrence of liens, (vii) the incurrence of prohibitions on payments and asset transfers among the issuers and restricted subsidiaries and (viii) transactions with affiliates, among others. The indenture governing the 2020 Senior Notes contains customary events of default. If we do not apply the net cash proceeds of certain asset sales within specified deadlines, we will be required to offer to repurchase the 2020 Senior Notes at par (plus accrued and unpaid interest) with such proceeds. We are also required to offer to repurchase the 2020 Senior Notes at a price equal to 101% of their aggregate principal amount (plus accrued and unpaid interest) upon certain change of control events.

2021 Senior Notes

On April 16, 2013, we issued $550.0 million aggregate principal amount of 5.25% Senior Notes due 2021 (the “2021 Senior Notes”). The 2021 Senior Notes are unsecured and are not subject to registration rights. The net proceeds from the issuance of the 2021 Senior Notes were used to repay the outstanding balance under the Restated Revolving Credit Facility and for general corporate purposes, including the purchase of additional land inventory.

 

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The 2021 Senior Notes are guaranteed by the same Guarantors that guarantee the 2020 Senior Notes. The indenture governing the 2021 Senior Notes contains covenants, change of control and asset sale offer provisions that are similar to those contained in the indenture governing the 2020 Senior Notes.

2024 Senior Notes

On March 5, 2014, we issued $350.0 million aggregate principal amount of 5.625% Senior Notes due 2024 (the “2024 Senior Notes”). The 2024 Senior Notes are unsecured and are not subject to registration rights. The net proceeds from the issuance of the 2024 Senior Notes were used to repay the outstanding balance under the Restated Revolving Credit Facility and for general corporate purposes.

The 2024 Senior Notes mature on March 1, 2024. The 2024 Senior Notes are guaranteed by the same Guarantors that guarantee the 2020 and 2021 Senior Notes. The 2024 Senior Notes and the guarantees are senior unsecured obligations. The indenture governing the 2024 Senior Notes contains covenants that limit our ability to incur debt secured by liens and enter into certain sale and leaseback transactions. The indenture governing the 2024 Senior Notes contains events of default that are similar to those contained in the indentures governing the 2020 and the 2021 Senior Notes. The change of control provisions in the indenture governing the 2024 Senior Notes are similar to those contained in the indentures governing the 2020 and the 2021 Senior Notes, but a credit rating downgrade must occur in connection with the change of control before the repurchase offer requirement is triggered for the 2024 Senior Notes.

Prior to December 1, 2023, the 2024 Senior Notes are redeemable at a price equal to 100% plus a “make-whole” premium for payments through December 1, 2023 (plus accrued and unpaid interest). Beginning on December 1, 2023, the 2024 Senior Notes are redeemable at par (plus accrued and unpaid interest).

Revolving Credit Facility

On January 15, 2014, TMC and various other subsidiaries of TMHC (collectively, the “Borrowers”), entered into Amendment No. 1 to the senior revolving credit facility entered into with a syndicate of third party banks and financial institutions in July 2011 and amended and restated as of April 13, 2012 and further amended and restated as of April 12, 2013 (the “Restated Revolving Credit Facility”). This Amendment No. 1 released Monarch from all of its obligations under the Restated Revolving Credit Facility. As a result, the only borrower under the Restated Revolving Credit Facility is TMC. The Restated Revolving Credit Facility is guaranteed by the same Guarantors that guarantee the 2020 Senior Notes. The Restated Revolving Credit Facility matures on April 12, 2017.

The Restated Revolving Credit Facility contains certain “springing” financial covenants, requiring TMM Holdings and its subsidiaries to comply with a certain maximum capitalization ratio and a certain minimum consolidated tangible net worth test. The financial covenants would be in effect for any fiscal quarter during which any (a) loans under the Restated Revolving Credit Facility are outstanding during the last day of such fiscal quarter or on more than five separate days during such fiscal quarter or (b) undrawn letters of credit (except to the extent cash collateralized) issued under the Restated Revolving Credit Facility in an aggregate amount greater than $40.0 million or unreimbursed letters of credit issued under the Restated Revolving Credit Facility are outstanding on the last day of such fiscal quarter or for more than five consecutive days during such fiscal quarter. For purposes of determining compliance with the financial covenants for any fiscal quarter, the Restated Revolving Credit Facility provides that TMC may exercise an equity cure by issuing certain permitted securities for cash or otherwise recording cash contributions to its capital that will, upon the contribution of such cash to TMC, be included in the calculation of consolidated tangible net worth and consolidated total capitalization. The equity cure right is exercisable up to twice in any period of four consecutive fiscal quarters and up to five times overall. The maximum debt to total capitalization ratio is 0.60 to 1.00. The ratio as calculated by the Borrowers at December 31, 2014 was 0.41 to 1.00. The minimum consolidated tangible net worth requirement was $1.3 billion at December 31, 2014. At December 31, 2014, the Borrowers’ tangible net worth, as defined in the Restated Revolving Credit Facility, was $1.7 billion. At December 31, 2014, these ratio calculations were inclusive of our Monarch business.

The Restated Revolving Credit Facility contains certain restrictive covenants including limitations on incurrence of liens, dividends and other distributions, asset dispositions and investments in entities that are not guarantors, limitations

 

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on prepayment of subordinated indebtedness and limitations on fundamental changes. The Restated Revolving Credit Facility contains customary events of default, subject to applicable grace periods, including for nonpayment of principal, interest or other amounts, violation of covenants (including financial covenants, subject to the exercise of an equity cure), incorrectness of representations and warranties in any material respect, cross default and cross acceleration, bankruptcy, material monetary judgments, ERISA events with material adverse effect, actual or asserted invalidity of material guarantees and change of control. As of December 31, 2014, we were in compliance with all of the covenants under the Restated Revolving Credit Facility.

Mortgage Company Loan Facilities

Borrowings under our TMHF warehouse facilities are accounted for as secured borrowings under ASC Topic 860, ‘Transfers and Servicing.” Total capacity under the TMHF warehouse facilities available to TMHC at December 31, 2014 is $235.0 million. The following table summarizes the terms of our TMHF warehouse facilities:

 

    At December 31, 2014

Facility

  Amount Drawn     Facility Amount     Interest Rate   Expiration Date    Collateral (1)

Flagstar

  $ 62,894      $ 85,000      LIBOR + 2.5%   30 days written notice    Mortgage Loans

Comerica

    11,430        50,000      LIBOR + 2.75%   August 19, 2015    Mortgage Loans

JPMorgan

    86,426        100,000 (2)    (3)   September 28, 2015    Pledged Cash
 

 

 

   

 

 

        

Total

$ 160,750    $ 235,000   
 

 

 

   

 

 

        

 

(1)  The mortgage borrowings outstanding as of December 31, 2014 and 2013, are collateralized by $191.1 million and $95.7 million, respectively, of mortgage loans held for sale, which comprise the balance of mortgage receivables and $1.3 million and $2.0 million, respectively, of restricted short-term investments which are included in restricted cash in the accompanying Consolidated Balance Sheets.
(2)  The warehouse facility with JPMorgan has a maximum credit line of $50.0 million. On December 12, 2014 the agreement was temporarily amended to increase the capacity from $50.0 million to $100.0 million. Effective January 23, 2015, the temporary increase expired.
(3)  Interest under the JPMorgan agreement ranges from 2.50% plus 30-day LIBOR to 2.875% plus 30-day LIBOR or 0.25% (whichever is greater).

Loans Payable and Other Borrowings

Loans payable and other borrowings as of December 31, 2014 consist of project-level debt due to various land sellers and municipalities, and are generally secured by the land that was acquired. Principal payments generally coincide with corresponding project lot sales or a principal reduction schedule. The weighted average interest rate on $102.0 million of the loans as of December 31, 2014 was 6.5% per annum, and $45.5 million of the loans were non-interest bearing.

Letters of Credit, Surety Bonds and Financial Guarantees

The following table summarizes our available and issued letters of credit as of the dates indicated:

 

     Year Ended December 31,  
     2014      2013  
(In thousands)    Available      Issued      Available      Issued  

Restated Revolving Credit Facility

   $ 200,000       $ 35,071       $ 200,000       $ 26,456   

In the course of land development and acquisition, we have issued letters of credit under our Restated Revolving Credit Facility to various land sellers and municipalities in the amount of $35.1 million outstanding as of December 31, 2014.

Operating Cash Flow Activities

Our net cash used in operating activities decreased approximately $18.2 million for the year ended December 31, 2014 compared to 2013. The decrease in cash used in operating activities was primarily attributable to an increase in net

 

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income and lower cash spend on real estate inventory and land deposits year over year, offset by lower stock compensation expense, and an increase in cash paid for prepaids during the 2014 period. Also contributing to the change was a decrease in income taxes payable as a result of the timing of estimated income tax payments.

Investing Cash Flow Activities

Net cash used in investing activities increased $13.7 million for the year ended December 31, 2014 compared to 2013. The increase in cash used in 2014 was primarily the result of an increase in investments in unconsolidated entities as we continue to fund new joint venture operations.

Financing Cash Flow Activities

Net cash provided by financing activities decreased $28.6 million for the year ended December 31, 2014 compared to 2013. Net cash provided by financing activities changed as a result of net proceeds from the IPO in 2013 which was in part used to repay a portion of the 2020 Senior Notes in 2013, the issuance of $350.0 million of 2024 Senior Notes in March 2014, an increase in net borrowings on mortgage warehouse facilities as a result of an increase in mortgage originations year over year, and an increase in net borrowings on the Restated Revolving Credit Facility year over year to fund new real estate acquisitions.

Commercial Commitments and Off-Balance Sheet Arrangements as of December 31, 2014

 

     Payments Due by Period (in thousands)  
     Totals      Less than
1 year
     1-3 years      3-5 years      More than
5 years
 

Operating lease obligations

   $ 20,554       $ 5,489       $ 7,658       $ 4,453       $ 2,954  

Topic 740 obligations including interest and penalties

     1,563         —          1,563         —           —    

Land purchase contracts (1)

     323,513         130,079         101,851         48,923         42,660   

Debt outstanding (2)

     1,737,106         252,278         67,409         22,429         1,394,990   

Estimated interest expense (3)

     636,596         93,750         175,394         173,370         194,082   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

$ 2,719,332    $ 481,596    $ 353,875    $ 249,175    $ 1,634,686   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Represents remaining purchase price due under full-recourse land purchase contracts.
(2)  As of December 31, 2014 total debt outstanding includes $485.4 million aggregate principal amount and $3.4 million of unamortized bond premium of 2020 Senior Notes, $550.0 aggregate principal amount of 2021 Senior Notes, $350.0 million aggregate principal amount of 2024 Senior Notes, $160.8 million of mortgage borrowings by TMHF and $147.5 million of loans and other borrowings. Scheduled maturities of certain loans and other borrowings as of December 31, 2014 reflect estimates of anticipated lot take-downs associated with such loans.
(3)  Estimated interest expense amounts for debt outstanding at the respective contractual interest rates, the weighted average of which is 5.7% as of December 31, 2014.

The following table summarizes our letters of credit and surety bonds as of the dates indicated:

 

     As of December 31,  
(In thousands)    2014      2013  

Letters of credit

   $ 35,071       $ 26,457   

Surety bonds

     280,559         130,459   
  

 

 

    

 

 

 

Total outstanding letters of credit and surety bonds

$ 315,630    $ 156,916   
  

 

 

    

 

 

 

Investments in Land Development and Homebuilding Joint Ventures or Unconsolidated Entities

We participate in strategic land development and homebuilding joint ventures with related and unrelated third parties. The use of these entities, in some instances, enables us to acquire land to which we could not otherwise obtain access, or

 

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could not obtain access on terms that are favorable. Our partners in these joint ventures historically have been land owners/developers, other homebuilders and financial or strategic partners. Joint ventures with land owners/developers have given us access to sites owned or controlled by our partners. Joint ventures with other homebuilders have provided us with the ability to bid jointly with our partners for large or expensive land parcels. Joint ventures with financial partners have allowed us to combine our homebuilding expertise with access to our partners’ capital. Joint ventures with strategic partners have allowed us to combine our homebuilding expertise with the specific expertise (e.g. commercial or infill experience) of our partners.

In certain of our unconsolidated joint ventures, we enter into loan agreements, whereby one of our subsidiaries will provide the lenders with customary guarantees, including completion, indemnity and environmental guarantees subject to usual non-recourse terms.

The following is a summary of investments in unconsolidated land development and homebuilding joint ventures:

 

     As of December 31,  
(In thousands)    2014      2013  

East

   $ 57,138       $ 20,191   

West

     51,909         —     

Other

     1,244         1,244   
  

 

 

    

 

 

 

Total

$ 110,291    $ 21,435   
  

 

 

    

 

 

 

The following is a rollforward of the investments in unconsolidated land development and homebuilding joint ventures:

 

(In thousands)    East      West      Corporate      Total  

Investment balance, December 31, 2013

   $ 20,191       $ —        $ 1,244       $ 21,435  

Joint venture income

     3,609         386        1,410         5,405   

Distributions

     (1,862      (474 )      (1,410      (3,746

Contributions

     35,200        51,997         —          87,197   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment balance, December 31,2014

$ 57,138    $ 51,909    $ 1,244    $ 110,291   
  

 

 

    

 

 

    

 

 

    

 

 

 

The summarized balance sheets of our unconsolidated land development and homebuilding joint ventures were as follows:

Summary balance sheet

 

     As of December 31,  
(In thousands)    2014      2013  

Assets

   $ 456,821       $ 75,797   

Liabilities

     138,431         31,954   

Equity

     318,390         43,843   

Land Purchase and Land Option Contracts

We enter into land purchase and option contracts to procure land or lots for the construction of homes in the ordinary course of business. Lot option contracts enable us to control significant lot positions with a minimal capital investment and substantially reduce the risks associated with land ownership and development. As of December 31, 2014, we had outstanding land purchase and lot option contracts of $323.5 million for 5,372 lots. We are obligated to close the transaction under our land purchase contracts. However, our obligations with respect to the option contracts are generally limited to the forfeiture of the related non-refundable cash deposits and/or letters of credit provided to obtain the options. For additional detail, see Liquidity and Capital Resources — Commercial Commitments and Off-Balance Sheet Arrangements as of December 31, 2014.

 

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our operations are interest rate sensitive. We monitor our exposure to changes in interest rates and incur both fixed rate and variable rate debt. At December 31, 2014, 88.4% of our debt was fixed rate and 11.6% was variable rate. None of our market sensitive instruments were entered into for trading purposes. For fixed rate debt, changes in interest rates generally affect the fair value of the debt instrument, but not our earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact the fair value of the debt instrument but may affect our future earnings and cash flows, and may also impact our variable rate borrowing costs, which principally relate to any borrowings under our Restated Revolving Credit Facility and to any borrowings by TMHF under its various warehouse facilities. As of December 31, 2014, we had $40.0 million outstanding borrowings under our $400.0 million Restated Revolving Credit Facility. We had $324.9 million of additional availability for borrowings and $164.9 million of additional availability for letters of credit (giving effect to $35.1 million of letters of credit outstanding as of such date). See Item 7 — Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Liquidity and Capital Resources — Capital Resources –Revolving Credit Facility. Our fixed rate debt is subject to a requirement that we offer to purchase the 2020 Senior Notes and the 2021 Senior Notes at par with certain proceeds of asset sales (to the extent not applied in accordance with the indentures governing such Senior Notes). We are also required to offer to purchase all of the outstanding Senior Notes at 101% of their aggregate principal amount upon the occurrence of specified change of control events. Other than in those circumstances, we do not have an obligation to prepay fixed rate debt prior to maturity and, as a result, interest rate risk and changes in fair value would not expect to have a significant impact on our cash flows related to our fixed rate debt until such time as we are required to refinance, repurchase or repay such debt.

We are not materially exposed to interest rate risk associated with TMHF’s mortgage loan origination business, because at the time any loan is originated, TMHF has identified the investor who will agree to purchase the loan on the interest rate terms that are locked in with the borrower at the time the loan is originated.

The following table sets forth principal cash flows by scheduled maturity and effective weighted average interest rates and estimated fair value of our debt obligations as of December 31, 2014. The interest rate for our variable rate debt represents the interest rate on our borrowings under our Restated Revolving Credit Facility and mortgage warehouse facilities. Because the mortgage warehouse facilities are effectively secured by certain mortgage loans held for sale which are typically sold within 20 days, its outstanding balance is included as a variable rate maturity in the most current period presented.

 

     Expected Maturity Date                 Fair
Value
 
(In millions, except percentage data)    2015     2016     2017     2018     2019     Thereafter     Total    

Fixed Rate Debt

   $ 52.2      $ 55.4      $ 13.4      $ 9.9      $ 13.8      $ 1,391.7      $ 1,536.3      $ 1,540.7   

Average interest rate (1)

     4.5     4.5     4.6     4.6     4.6     6.2     6.1     —    

Variable rate debt (2)

   $ 200.8        —         —         —         —         —       $ 200.8      $ 200.8   

Average interest rate

     2.6     —         —         —         —         —         2.6     —    

 

(1)  Represents the coupon rate of interest on the full principal amount of the debt.
(2)  Based upon the amount of variable rate debt at December 31, 2014, and holding the variable rate debt balance constant, each 1% increase in interest rates would increase the interest incurred by us by approximately $2.0 million per year.

Currency Exchange Risk

In December 2014, we entered into a derivative financial instrument in the form of a foreign currency forward. The derivative financial instrument hedged our exposure to the Canadian dollar in conjunction with the disposition of the Monarch business. The aggregate notional amount of the foreign exchange derivative financial instrument was $471.2 million at December 31, 2014. At December 31, 2014 the fair value of the instrument was not material to our consolidated financial position or results of operations. The final settlement of the derivative financial instrument occurred on January 30, 2015 and a gain will be recorded in the first quarter of 2015.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Taylor Morrison Home Corporation

Scottsdale, Arizona

We have audited the accompanying consolidated balance sheets of Taylor Morrison Home Corporation and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Taylor Morrison Home Corporation and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2015 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Phoenix, Arizona

February 27, 2015

 

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TAYLOR MORRISON HOME CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

     December 31,  
     2014     2013  

Assets

    

Cash and cash equivalents

   $ 234,217      $ 193,518   

Restricted cash

     1,310        3,807   

Real estate inventory:

    

Owned inventory

     2,511,623        1,993,985   

Real estate not owned under option agreements

     6,698        18,595   
  

 

 

   

 

 

 

Total real estate inventory

  2,518,321      2,012,580   

Land deposits

  34,544      38,011   

Mortgages receivable

  191,140      95,718   

Prepaid expenses and other assets, net

  89,210      79,921   

Other receivables, net

  85,274      50,592   

Investments in unconsolidated entities

  110,291      21,435   

Deferred tax assets, net

  258,190      242,656   

Property and equipment, net

  5,337      4,502   

Intangible assets, net

  5,459      9,325   

Goodwill

  23,375      23,375   

Assets of discontinued operations

  576,445      663,118   
  

 

 

   

 

 

 

Total assets

$ 4,133,113    $ 3,438,558   
  

 

 

   

 

 

 

Liabilities

Accounts payable

$ 122,466    $ 101,732   

Accrued expenses and other liabilities

  200,556      162,044   

Income taxes payable

  50,096      35,512   

Customer deposits

  70,465      62,033   

Senior notes

  1,388,840      1,039,497   

Loans payable and other borrowings

  147,516      143,341   

Revolving credit facility borrowings

  40,000      —     

Mortgage borrowings

  160,750      74,892   

Liabilities attributable to consolidated option agreements

  6,698      18,595   

Liabilities of discontinued operations

  168,565      256,011   
  

 

 

   

 

 

 

Total liabilities

  2,355,952      1,893,657   

COMMITMENTS AND CONTINGENCIES (Note 20)

Stockholders’ Equity

Class A Common Stock, $0.00001 par value, 400,000,000 shares authorized, 33,060,540 and 32,857,800 shares issued and outstanding as of December 31, 2014 and December 31, 2013, respectively

  —        —     

Class B Common Stock, $0.00001 par value, 200,000,000 shares authorized, 89,227,416 and 89,451,164 shares issued and outstanding as of December 31, 2014 and December 31, 2013, respectively

  1      1   

Preferred stock, $0.00001 par value, 50,000,000 shares authorized, no shares issued and outstanding as of December 31, 2014 and December 31, 2013

  —        —     

Additional paid-in capital

  374,358      372,789   

Retained earnings

  114,948      43,479   

Accumulated other comprehensive loss

  (10,910   (452
  

 

 

   

 

 

 

Total stockholders’ equity attributable to Taylor Morrison Home Corporation

  478,397      415,817   

Non-controlling interests — joint ventures

  6,528      7,236   

Non-controlling interests — Principal Equityholders

  1,292,236      1,121,848   
  

 

 

   

 

 

 

Total stockholders’ equity

  1,777,161      1,544,901   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 4,133,113    $ 3,438,558   
  

 

 

   

 

 

 

 

See accompanying Notes to the Consolidated Financial Statements

 

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TAYLOR MORRISON HOME CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

 

     Year Ended December 31,  
     2014     2013     2012  

Home closings revenue, net

   $ 2,619,558      $ 1,857,950      $ 986,198   

Land closings revenue

     53,381        27,760        33,123   

Mortgage operations revenue

     35,493        30,371        21,861   
  

 

 

   

 

 

   

 

 

 

Total revenues

  2,708,432      1,916,081      1,041,182   

Cost of home closings

  2,082,819      1,457,454      795,979   

Cost of land closings

  39,696      26,316      27,296   

Mortgage operations expenses

  19,671      16,446      11,266   
  

 

 

   

 

 

   

 

 

 

Total cost of revenues

  2,142,186      1,500,216      834,541   

Gross margin

  566,246      415,865      206,641   

Sales, commissions and other marketing costs

  168,897      127,419      70,398   

General and administrative expenses

  81,153      77,198      41,867   

Equity in income of unconsolidated entities

  (5,405   (2,895   (1,214

Interest expense (income), net

  1,160      842      (758

Other expense, net

  18,447      2,842      3,704   

Loss on extinguishment of debt

  —        10,141      7,953   

Indemnification and transaction expenses

  —        195,773      13,034   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

  301,994      4,545      71,657   

Income tax provision (benefit)

  76,395      (23,810   (284,298
  

 

 

   

 

 

   

 

 

 

Net income from continuing operations

  225,599      28,355      355,955   

Income from discontinued operations — net of tax

  41,902      66,513      74,893   
  

 

 

   

 

 

   

 

 

 

Net income before allocation to non-controlling interests

  267,501      94,868      430,848   

Net (income) loss attributable to non-controlling interests — joint ventures

  (1,648   131      (28
  

 

 

   

 

 

   

 

 

 

Net income before non-controlling interests —

Principal Equityholders

  265,853      94,999      430,820   

Net (income) loss from continuing operations attributable to non-controlling interests — Principal Equityholders

  (163,790   1,442      (355,927

Net income from discontinued operations attributable to non-controlling interests — Principal Equityholders

  (30,594   (51,021   (74,893
  

 

 

   

 

 

   

 

 

 

Net income available to Taylor Morrison Home Corporation

$ 71,469    $ 45,420    $ —     
  

 

 

   

 

 

   

 

 

 

Earnings per common share — basic (1):

Income from continuing operations

$ 1.83    $ 0.91      N/A   

Discontinued operations — net of tax

$ 0.34    $ 0.47      N/A   
  

 

 

   

 

 

   

 

 

 

Net income available to Taylor Morrison Home Corporation

$ 2.17    $ 1.38      N/A   

Earnings per common share — diluted (1):

Income from continuing operations

$ 1.83    $ 0.91      N/A   

Discontinued operations — net of tax

$ 0.34    $ 0.47      N/A   
  

 

 

   

 

 

   

 

 

 

Net income available to Taylor Morrison Home Corporation

$ 2.17    $ 1.38      N/A   

Weighted average number of shares of common stock (1):

Basic

  32,937      32,840      N/A   

Diluted

  122,313      122,319      N/A   

 

(1)  Prior to the Reorganization Transactions on April 9, 2013 and the IPO no common shares were outstanding. See Note 13 — Stockholders’ Equity — Reorganization Transactions for additional information.

See accompanying Notes to the Consolidated Financial Statements

 

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TAYLOR MORRISON HOME CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

     Year Ended December 31,  
            2014                   2013                   2012         

Income before non-controlling interests, net of tax

   $ 267,501      $ 94,868      $ 430,848   

Other comprehensive income (loss), net of tax:

      

Foreign currency translation adjustments, net of tax

     (35,421     (16,727     (1,073

Post-retirement benefits adjustments, net of tax

     (3,295     7,483        (3,227
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax

  (38,716   (9,244 )  (1)    (4,300

Comprehensive income

  228,785      85,624      426,548   

Comprehensive (income) loss attributable to non-controlling interests — joint ventures

  (1,648   131      28   

Comprehensive income attributable to non-controlling interests — Principal Equityholders

  (166,126   (39,876   —     
  

 

 

   

 

 

   

 

 

 

Comprehensive income available to Taylor Morrison Home

Corporation

$ 61,011    $ 45,879    $ 426,576   
  

 

 

   

 

 

   

 

 

 

 

  

 

(1) The difference between other comprehensive income reported on this schedule and other comprehensive income reported in the Consolidated Statement of Stockholders’ Equity is the result of deferred tax assets on post retirement benefits recorded in net income in the current year.

See accompanying Notes to the Consolidated Financial Statements

 

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TAYLOR MORRISON HOME CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

 

  Common Stock                              
  Class A   Class B   Additional
Paid-in
Capital
  Stockholders’ equity  
  Shares   Amount   Shares   Amount   Amount   Net
Owners’
Equity
  Retained
Earnings
  Accumulated
Other
Comprehensive
Income (Loss)
  Non-controlling
Interest - Joint
Venture
  Non-controlling
Interest - Principal
Equityholders
  Total
Stockholders’
Equity
 

Balance — December 31, 2011

  —      $ —        —      $ —      $ —      $ 649,209    $ —      $ (30,065 $ 9,421    $ —      $ 628,565   

Net income

  —        —        —        —        —        430,820      —        —        28      —        430,848   

Other comprehensive loss

  —        —        —        —        —        —        —        (4,300   —        (4,300

Share based compensation

  —        —        —        —        —        1,975      —        —        —        —        1,975   

Distributions to non-controlling interests

  —        —        —        —        —        —        —        —        (1,800   —        (1,800

Contribution of debt in exchange for equity

  —        —        —        —        —        146,633      —        —        —        —        146,633   

Non-controlling interest of acquired entity

  —        —        —        —        —        —        —        —        241      —        241   

Issuance of partnership units

  —        —        —        —        —        2,413      —        —        —        —        2,413   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance — December 31, 2012

  —        —        —        —        —        1,231,050      —        (34,365   7,890      —        1,204,575   

Establish non-controlling interest on April 12, 2013

  —        —        —        —        —        (1,231,050   —        34,365      —        1,196,685      —     

Issuance of Class A Common Stock, net of offering costs

  32,857,800      —        —        —        668,598      —        —        —        —        —        668,598   

Issuance of Class B Common Stock, net of offering costs

  —        —        112,784,964      1      —        —        —        —        —        —        1   

Repurchase of New TMM Units and corresponding number of Class B Common Stock

  —        —        (23,333,800   —        —        —        —        —        —        (485,782   (485,782

Offering costs capitalized to equity

  —        —        —        —        —        —        —        —        —        (10,775   (10,775

Allocation of dilution on IPO Class A Common Stock

  —        —        —        —        (297,591   —        —        —        —        297,591      —     

Net income (loss)

  —        —        —        —        —        —        45,420      —        (131   49,579      94,868   

Other comprehensive loss

  —        —        —        —        —        —        —        (452   —        (8,792   (9,244

Stock based compensation

  —        —        —        —        1,782      —        —        —        —        85,536      87,318   

Distributions to non-controlling interests - joint ventures

  —        —        —        —        —        —        —        —        (417   —   —        (417

Non-controlling interest of acquired equity

  —        —        —        —        —        —        —        —        (106   —        (106

Dividends

  —        —        —        —        —        —        (1,941   —        —        (2,194   (4,135
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance — December 31, 2013

  32,857,800      —        89,451,164      1      372,789      —        43,479      (452   7,236      1,121,848      1,544,901   

Net income (loss)

  —        —        —        —        —        —        71,469      —        1,648      194,384      267,501   

Other comprehensive (loss) income

  —        —        —        —        —        —        —        (10,458   —        (28,258   (38,716

Exchange of New TMM Units and corresponding number of Class B Common Stock

  196,024      —        (196,024   —        —        —        —        —        —        —        —     

Cancellation of forfeited New TMM Units and corresponding number of Class B Common Stock

  —        —        (27,724   —        —        —        —        —        —        —        —     

Issuance of restricted stock units

  6,716      —        —        —        —        —        —        —        —        —        —     

Stock based compensation

  —        —        —        —        1,569      —        —        —        —        4,262      5,831   

Distributions to non-controlling interests - joint ventures

  —        —        —        —        —        —        —        —        (2,356   —        (2,356
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance — December 31, 2014

  33,060,540    $ —        89,227,416    $ 1    $ 374,358    $ —      $ 114,948    $ (10,910 $ 6,528    $ 1,292,236    $ 1,777,161   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying Notes to the Consolidated Financial Statements

 

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TAYLOR MORRISON HOME CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     For the Year ended December 31,  
     2014     2013     2012  

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

   $ 267,501      $ 94,868      $ 430,848   

Adjustments to reconcile net income to net cash used in operating activities:

      

Equity in income of unconsolidated entities

     (26,735     (37,563     (22,964

Stock compensation expense

     5,831        87,318        1,975   

Distributions of earnings from unconsolidated entities

     32,966        30,136        36,746   

Depreciation and amortization

     4,090        3,462        4,370   

Contingent consideration

     13,532        2,258        —     

Loss on extinguishment of debt

     —          10,141        7,853   

Deferred income taxes

     (17,703     30,662        (278,880

Changes in operating assets and liabilities:

      

Real estate inventory and land deposits

     (310,550     (450,147     (331,116

Receivables, prepaid expenses and other assets

     (136,636     (5,183     (109,970

Customer deposits

     (11,378     15,795        16,845   

Accounts payable, accrued expenses and other liabilities

     33,947        33,129        6,089   

Income taxes payable

     11,445        33,191        23,735   
  

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (133,690     (151,933     (214,469
  

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Purchase of property and equipment

     (3,723     (3,786     (2,753

Business acquisitions, net of cash acquired

     —          —          (114,571

Distribution from unconsolidated entities

     1,728        8,840        —     

Decrease (increase) in restricted cash

     10,743        (12,211     (8,645

Investments of capital into unconsolidated entities

     (98,199     (68,634     (12,967
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (89,451     (75,791     (138,936
  

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Net proceeds from the issuance of Class A common stock

     —          668,598        —     

Purchase of New TMM Units and corresponding number of shares of Class B Common Stock

     —          (485,782     —     

Borrowings on line of credit related to mortgage borrowings

     658,708        703,536        525,745   

Repayment on line of credit related to mortgage borrowing

     (572,850     (709,004     (478,115

Proceeds from loans payable and other borrowings

     41,990        45,289        41,598   

Repayments of loans payable and other borrowings

     (194,660     (182,977     (69,028

Borrowings on revolving credit facility

     253,000        907,000        50,000   

Repayments on revolving credit facility

     (213,000     (957,000     —     

Proceeds from the issuance of senior notes

     350,000        550,000        675,000   

Repayments on senior notes

     —          (189,608     (350,000

Payment of deferred financing costs

     (6,255     (9,680     (20,282

Payment of contingent consideration

     (5,250     —          —     

Distributions to non-controlling interests — joint ventures

     (2,356     (418     (1,800

Intercompany borrowings

     —          (7     —     

Equity (distributions) contributions

     —          (2,000     2,413   
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     309,327        337,947        375,531   
  

 

 

   

 

 

   

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

     (13,162     (21,644     (881
  

 

 

   

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

   $ 73,024      $ 88,579      $ 21,245   

CASH AND CASH EQUIVALENTS — Beginning of period (1)

     389,181        300,602        279,322   
  

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS — End of period (2)

   $ 462,205      $ 389,181      $ 300,567   
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

      

Income taxes paid, net

   $ (99,071   $ (24,354   $ (45,088
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:

      

Conversion of Sponsor loans payable to additional Class A Units

   $ —        $ —        $ 146,663   
  

 

 

   

 

 

   

 

 

 

Conversion of joint venture loans receivable for equity in joint venture

   $ —        $ —        $ 36,855   
  

 

 

   

 

 

   

 

 

 

Loans payable and liabilities assumed related to business acquisition

   $ —        $ —        $ 54,926   
  

 

 

   

 

 

   

 

 

 

(Decrease) increase in loans payable issued to sellers in connection with land purchase contracts

   $ (88,893   $ 226,441      $ 134,001   
  

 

 

   

 

 

   

 

 

 

Decrease in income taxes payable

$ 22    $ 102,422    $ 15,233   
  

 

 

   

 

 

   

 

 

 

 

 

(1)  Cash and cash equivalents at the beginning of the period ended December 31, 2013 includes approximately $35,000 of TMHC cash that was not consolidated with TMM and included in the cash balance at December 31, 2012.
(2)  Cash and cash equivalents shown here include the cash related to Monarch. For the years ended December 31, 2014, 2013 and 2012, cash held at Monarch was $227,988, $195,663 and $189,519, respectively.

See accompanying Notes to the Consolidated Financial Statements

 

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TAYLOR MORRISON HOME CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS

Organization and Description of the Business — Taylor Morrison Home Corporation (referred to herein as “TMHC,” “we,” “our,” “the Company” and “us”), through its divisions and segments, owns and operates a residential homebuilding business and is a developer of lifestyle communities. We currently operate in Arizona, California, Colorado, Florida and Texas. Our homes appeal to entry-level, move-up, 55+ and luxury homebuyers. The Company operates under our Taylor Morrison and Darling Homes brands. Our business has ten homebuilding operating divisions, and a mortgage operations division, which are organized into three reportable segments: East, West, and Mortgage. The communities in our East and West segment offer single family attached and/or detached homes. We are the general contractors for all real estate projects and retain subcontractors for home construction and site development. Our Mortgage Operations reportable segment provides financial services to customers in the United States through our wholly owned mortgage subsidiary, operating as Taylor Morrison Home Funding, LLC (“TMHF”).

On July 13, 2011, TMM Holdings Limited Partnership (“TMM Holdings”), an entity formed by a consortium comprised of affiliates of TPG Global, LLC (the “TPG Entities” or “TPG”), investment funds managed by Oaktree Capital Management, L.P. (“Oaktree”) or their respective subsidiaries (the “Oaktree Entities”), and affiliates of JH Investments, Inc. (the “JH Entities” and together with the TPG Entities and Oaktree Entities, the “Principal Equityholders”), acquired (the “Acquisition”) our predecessors, Taylor Woodrow Holdings (USA), Inc., now known as Taylor Morrison Communities Inc.

On April 12, 2013, TMHC completed the initial public offering (the “IPO”) of its Class A common stock, par value $0.00001 per share (the “Class A Common Stock”). The shares of Class A Common Stock began trading on the New York Stock Exchange on April 10, 2013 under the ticker symbol “TMHC.” As a result of the completion of the IPO and a series of transactions pursuant to a Reorganization Agreement dated as of April 9, 2013 (the “Reorganization Transactions”), TMHC became the indirect parent of TMM Holdings through the formation of TMM Holdings II Limited Partnership (“New TMM”). In the Reorganization Transactions, the TPG Entities and the Oaktree Entities each formed new holding vehicles to hold interests in New TMM (the “TPG Holding Vehicle” and the “Oaktree Holding Vehicle” respectively). As of December 31, 2014 and 2013, the Principal Equityholders owned 73.0% and 73.1%, respectively of the Company.

On December 16, 2014, we announced we entered into a definitive agreement to sell 100% of the capital stock of Monarch Corporation (“Monarch”) a subsidiary that at the time owned the operations of our Canadian operations. The actual purchase price paid and cash amounts were determined using Monarch’s final December 31, 2014 balance sheet.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation — The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), include the accounts of TMHC and our consolidated subsidiaries, other entities where we have a controlling financial interest, and of variable interest entities if we are deemed the primary beneficiary. Intercompany balances and transactions have been eliminated in consolidation.

Unless otherwise stated, amounts are shown in U.S. dollars. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date, and revenues and expenses are translated at average rates of exchange prevailing during the period. Translation adjustments resulting from this process are recorded to accumulated other comprehensive income (loss) in the accompanying Consolidated Balance Sheets and Statements of Stockholders’ Equity.

Reclassifications — Certain prior period amounts have been reclassified to conform with current period financial statement presentation.

Discontinued Operations — As a result of our decision in December 2014 to dispose of our Canadian operating segment, specifically Monarch Corporation, the operating results and financial position of the Monarch business are presented as discontinued operations for all periods presented (see Note 4 — Discontinued Operations and Note 21 — Subsequent

 

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Events). We determined that Monarch should be presented as a discontinued operation based on a committed plan to sell, and our determination that the sale of the entity was probable at December 31, 2014.

Non-controlling interests — In the Reorganization Transactions, the Company became the sole owner of the general partner of New TMM. As the general partner of New TMM, the Company exercises exclusive and complete control over New TMM. Consequently:

 

    For periods subsequent to April 9, 2013, the Company consolidates New TMM and records a non-controlling interest in its Consolidated Balance Sheets for the economic interests in New TMM, that are directly or indirectly held by the Principal Equityholders or by members of management and the Board of Directors; and

 

    The Consolidated Financial Statements as of and for the year ended December 31, 2012 reflect the consolidated operations of TMM Holdings only as there were no operating activities or equity transactions in TMHC during that period.

Use of Estimates — The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Significant estimates include real estate development costs to complete, valuation of real estate, valuation of equity awards, valuation allowance on deferred tax assets and reserves for warranty and self-insured risks. Actual results could differ from those estimates.

Concentration of Credit Risk — Financial instruments that potentially subject us to concentrations of credit risk are primarily cash and cash equivalents. Cash and cash equivalents include amounts on deposit with financial institutions in the U.S. that are in excess of the Federal Deposit Insurance Corporation federally insured limits of up to $250,000 and amounts on deposit with financial institutions in Canada that are in excess of the Canadian Deposit Insurance Corporation federally insured limits of up to $100,000. No losses have been experienced to date.

In addition, the Company is exposed to credit risk to the extent that mortgage and loan borrowers may fail to meet their contractual obligations. This risk is mitigated by collateralizing the mortgaged property or land that was sold to the buyer.

Cash and Cash Equivalents — Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions, and investments with original maturities of 90 days or less. At December 31, 2014, the majority of our cash and cash equivalents were invested in both highly liquid and high-quality money market funds or on deposit with major financial institutions.

Restricted Cash — Restricted cash at December 31, 2014 consists of $1.3 million pledged to collateralize mortgage credit lines and at December 31, 2013 consists of $2.0 million pledged to collateralize mortgage credit lines through certificates of deposit known as Certificate of Deposit Account Registry Service (CDARS).

Real Estate Inventory — Inventory consists of raw land, land under development, land held for future development, homes under construction, completed homes and model homes. Inventory is carried at cost, less impairment, if applicable. In addition to direct carrying costs, we also capitalize interest, real estate taxes, and related development costs that benefit the entire community, such as field construction supervision and related direct overhead. Home construction costs are accumulated and charged to cost of sales at home closing using the specific identification method. Land acquisition, development, interest, taxes and overhead costs are allocated to homes and units using methods that approximate the relative sales value method. These costs are capitalized to inventory from the point development begins to the point construction is completed. Changes in estimated costs to be incurred in a community (cost to complete) are generally allocated to the remaining homes on a prospective basis. For those communities that have been temporarily closed or where development has been discontinued, costs are expensed as incurred until operations resume.

We review our real estate inventory for indicators of impairment by community on a quarterly basis. In conducting our impairment analysis, we evaluate the margins on homes that have been delivered, margins on homes under sales contracts in backlog, projected margins with regard to future home sales over the life of the community, projected margins with regard to future land sales and the estimated fair value of the land itself. If indicators of impairment are

 

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present for a community, we perform an additional analysis to determine if the carrying value of the assets in that community exceeds the undiscounted cash flows estimated to be generated by those assets. If the carrying value of the assets does exceed their estimated undiscounted cash flows, the assets are deemed to be impaired and are recorded at fair value as of the assessment date. An impairment charge is taken in the period with a charge to cost of home closings.

Critical assumptions in our cash flow model include: (i) the projected absorption pace for home sales in the community, based on general economic conditions that will have an impact on the market in which the community is located and competition within the market; (ii) the expected sales prices and sales incentives to be offered; (iii) costs to build and deliver homes in the community, including, but not limited to, land and land development costs, home construction costs, interest costs and overhead costs; and (iv) alternative uses for the property, such as the possibility of a sale of the entire community to another builder or the sale of individual home sites. Consideration is also given to development budgets and sales pace and price. Discount rates are determined using a base rate, which may be increased depending on the total remaining lots in a community, the development status of the land, the market in which it is located and if the product is higher-priced with potentially lower demand. Historically, our discount rates have been in the range of 12.0% to 18.0%. Inventory impairment charges are recognized against all inventory costs of a community, such as land, land improvements, cost of home construction and capitalized interest. For the years ended December 31, 2014, 2013 and 2012, no impairment charges were recorded.

In certain cases, we may elect to cease development and/or marketing of an existing community if we believe the economic performance of the community would be maximized by deferring development for a period of time to allow for temporary market conditions to improve. The decision may be based on financial and/or operational metrics as determined by us. If we decide to cease developing a project, we will impair such project if necessary to its fair value as discussed above and then cease future development and/or marketing activity until such a time when we believe that market conditions have improved and economic performance can be maximized.

Our assessment of the carrying value of our assets typically include subjective estimates of future performance, including the timing of when development will recommence, the type of product to be offered, and the margin to be realized. In the future, some of these inactive communities may be re-opened while others may be sold. As of December 31, 2014, we had 19 inactive projects with a carrying value of $28.0 million of which $6.1 million and $21.9 million is in the East and West segments, respectively. During the year ended December 31, 2014, we placed one community into inactive status and moved one community into active status.

As discussed in this note under Investments in Consolidated and Unconsolidated Entities — Consolidated Option Agreements, in the ordinary course of business, we acquire various specific performance lots through existing lot option agreements. Real estate not owned under certain of these contracts is consolidated into real estate inventory with a corresponding liability in liabilities attributable to consolidated option agreements in the Consolidated Balance Sheets.

Land Deposits —We provide deposits related to land options and land purchase contracts, which are capitalized when paid and classified as land deposits until the associated property is purchased. To the extent the deposits are non-refundable, they are charged to expense if the land acquisition process is terminated or no longer determined probable. We review the likelihood of the acquisition of contracted lots in conjunction with our periodic real estate inventory impairment analysis. Non-refundable deposits are recorded as a component of real estate inventory in the accompanying Consolidated Balance Sheets at the time the deposit is applied to the acquisition price of the land based on the terms of the underlying agreements.

Mortgages Receivable — Mortgages receivable consists of mortgages due from buyers of Taylor Morrison homes that are financed through our mortgage brokerage subsidiary, TMHF. Mortgages receivable are held for sale and are carried at fair value, which is calculated using observable market information, including pricing from actual market transactions, investor commitment prices, or broker quotations.

 

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Prepaid Expenses and Other Assets, net — Prepaid expenses and other assets consist of the following (in thousands):

 

     As of December 31,  
     2014      2013  

Prepaid expenses

   $ 75,700       $ 62,822   

Other assets

     13,510         17,099   
  

 

 

    

 

 

 

Total prepaid expenses and other assets, net

$ 89,210    $ 79,921   
  

 

 

    

 

 

 

Our prepaid expenses consist primarily of unamortized debt issuance costs, sales commissions, sales presentation centers and model home costs, such as design fees and furniture. At December 31, 2014 and 2013, prepaid debt issuance costs consisted of $26.9 million and $26.7 million, respectively, of aggregate unamortized costs related to the various Senior Notes issuances and our revolving credit facility. During the year ended December 31, 2014 and 2013, we amortized $5.9 million and $5.3 million of such debt issue costs, respectively. Prepaid sales commissions are recorded on pre-closing sales activities, which are recognized on the ultimate closing of the units to which they relate. The model home and sales presentation centers costs are paid in advance and amortized over the life of the project on a per-unit basis, or a maximum of three years.

Other assets consist primarily of various operating and escrow deposits, pre-acquisition costs and other deferred costs.

Other Receivables, net — Other receivables primarily consist of amounts expected to be recovered from various community development districts and utility deposits. Allowances of $0.3 and $0.5 million at December 31, 2014 and 2013, respectively, are maintained for potential credit losses based on historical experience, present economic conditions, and other factors considered relevant. Allowances are generally recorded in other expense, net when it becomes likely that some amount will not be collectible. Other receivables are written off when it is determined that collection efforts will no longer be pursued.

Investments in Unconsolidated and Consolidated Entities

Unconsolidated Joint Ventures — We use the equity method of accounting for entities over which we exercise significant influence but do not have a controlling interest over the operating and financial policies of the investee. For unconsolidated entities in which we function as the managing member, we have evaluated the rights held by our joint venture partners and determined that they have substantive participating rights that preclude the presumption of control. For joint ventures accounted for using the equity method, our share of net earnings or losses is included in equity in income of unconsolidated entities when earned and distributions are credited against our investment in the joint venture when received. These joint ventures are recorded in investments in unconsolidated entities on the Consolidated Balance Sheets.

Consolidated Joint Ventures — We are also involved in several joint ventures with independent third parties for land development and homebuilding activities. If a joint venture is determined to be a variable interest entity (“VIE”) and we are deemed to be the primary beneficiary, we consolidate the joint venture. For these entities, their financial statements are consolidated in the accompanying Consolidated Financial Statements and the other partners’ equity are recorded as non-controlling interests – joint ventures.

Consolidated Option Agreements — In the ordinary course of business, we enter into land and lot option purchase contracts in order to procure land or lots for the construction of homes. Lot option contracts enable us to control significant lot positions with a minimal initial capital investment and substantially reduce the risks associated with land ownership and development. In accordance with Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” we have concluded that when we enter into an option or purchase agreement to acquire land or lots and pay a non-refundable deposit, a VIE may be created because we may be deemed to have provided subordinated financial support and we will potentially absorb some or all of an entity’s expected losses if they occur. For each VIE, we assess whether we are the primary beneficiary by first determining if we have the ability to control the activities of the VIE that most significantly affect its economic performance. Such activities include, but are not limited to, the ability to determine the budget and scope of land development work, if any; the ability to control financing decisions for the VIE; the ability to acquire additional land into the VIE or dispose of land in the VIE not under contract with us; and the ability

 

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to change or amend the existing option contract with the VIE. If we are not able to control such activities, it is not considered the primary beneficiary of the VIE. If we do have the ability to control such activities, we will continue our analysis by determining if we are expected to absorb a potentially significant amount of the VIE’s losses or, if no party absorbs the majority of such losses, if we will potentially benefit from a significant amount of the VIE’s expected returns.

We evaluate our investments in unconsolidated entities for indicators of impairment during each reporting period. A series of operating losses of an investee or other factors may indicate that a decrease in value of our investment in the unconsolidated entity has occurred which is other-than-temporary. The amount of impairment recognized is the excess of the investment’s carrying amount over its estimated fair value. Additionally, we consider various qualitative factors to determine if a decrease in the value of the investment is other-than-temporary. These factors include age of the venture, stage in its life cycle, intent and ability for us to recover our investment in the entity, financial condition and long-term prospects of the entity, short-term liquidity needs of the unconsolidated entity, trends in the general economic environment of the land, entitlement status of the land held by the unconsolidated entity, overall projected returns on investment, defaults under contracts with third parties (including bank debt), recoverability of the investment through future cash flows and relationships with the other partners. If the Company believes that the decline in the fair value of the investment is temporary, then no impairment is recorded. We did not record any impairment charges for the years ended December 31, 2014, 2013 or 2012.

Income Taxes — We account for income taxes in accordance with ASC Topic 740, “Income Taxes.” Deferred tax assets and liabilities are recorded based on future tax consequences of both temporary differences between the amounts reported for financial reporting purposes and the amounts deductible for income tax purposes, and are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted.

We periodically assess our deferred tax assets, including the benefit from net operating losses, to determine if a valuation allowance is required. A valuation allowance is established when, based upon available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. Realization of the deferred tax assets is dependent upon, among other matters, taxable income in prior years available for carryback, estimates of future income, tax planning strategies, and reversal of existing temporary differences.

Property and Equipment, net — Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is generally computed using the straight-line basis over the estimated useful lives of the assets as follows:

Buildings: 20 – 40 years

Building and leasehold improvements: 10 years or remaining life of building/lease term if less than 10 years

Information systems : over the term of the license

Furniture, fixtures and computer and equipment: 5 – 7 years

Model and sales office improvements: lesser of 3 years or the life of the community

Maintenance and repair costs are expensed as incurred.

Depreciation expense was $3.0 million for the year ending December 31, 2014, $2.1 million for the year ending December 31, 2013 and $2.9 million for the year ended December 31, 2012. Depreciation expense is recorded in general and administrative expenses in the accompanying Consolidated Statements of Operations.

Intangible Assets, net — Intangible assets consist of tradenames, lot options and land supplier relationships, and non-compete covenants. We sell our homes under a number of trade names. The fair value of acquired intangible assets was determined using the income approach, and our trade names are being amortized on a straight line basis over ten years.

Goodwill — The excess of the purchase price of a business acquisition over the net fair value of assets acquired and liabilities assumed is capitalized as goodwill in accordance with ASC Topic 350, “Intangibles — Goodwill and Other.”

 

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ASC 350 requires that goodwill and intangible assets that do not have finite lives not be amortized, but instead be assessed for impairment at least annually or more frequently if certain impairment indicators are present. We perform our annual impairment test during the fourth quarter or whenever impairment indicators are present. For the years ended December 31, 2014 and 2013, there have been no additions to goodwill. For the years ended December 31, 2014, 2013 and 2012, there has been no impairment of goodwill.

Insurance Costs, Self-Insurance Reserves and Warranty Reserves — We have certain deductible limits under our workers’ compensation, automobile, and general liability insurance policies, and we record expense and liabilities for the estimated costs of potential claims for construction defects. The excess liability limits are $50 million per occurrence in the annual aggregate and apply in excess of automobile liability, employer’s liability under workers compensation and general liability policies. We also generally require our sub-contractors and design professionals to indemnify us for liabilities arising from their work, subject to certain limitations. We are the parent of Beneva Indemnity Company (“Beneva”), which provides insurance coverage for construction defects discovered during a period of time up to ten years following the sale of a home, coverage for premise operations risk, and property coverage. We accrue for the expected costs associated with the deductibles and self-insured amounts under our various insurance policies based on historical claims, estimates for claims incurred but not reported, and potential for recovery of costs from insurance and other sources. The estimates are subject to significant variability due to factors, such as claim settlement patterns, litigation trends, and the extended period of time in which a construction defect claim might be made after the closing of a home.

We offer warranties on homes that generally provide for a limited one-year warranty to cover various defects in workmanship or materials or to cover structural construction defects. We may also facilitate a ten-year warranty in certain markets or to comply with regulatory requirements. Warranty reserves are established as homes close in an amount estimated to be adequate to cover expected costs of materials and outside labor during warranty periods. Our warranty is not considered a separate deliverable in the arrangement, therefore, it is accounted for in accordance with ASC Topic 450, “Contingencies.” In accordance with ASC 450, warranties that are not separately priced are generally accounted for by accruing the estimated costs to fulfill the warranty obligation. The amount of revenue related to the product is recognized in full upon the delivery if all other criteria for revenue recognition have been met. Thus, the warranty would not be considered a separate deliverable in the arrangement since it is not priced apart from the home. As a result, we accrue the estimated costs to fulfill the warranty obligation in accordance with ASC 450 at the time a home closes, as a component of cost of home closings.

Our reserves are based on factors that include an actuarial study for structural, historical and anticipated claims, trends related to similar product types, number of home closings, and geographical areas. We also provide third-party warranty coverage on homes where required by Federal Housing Administration or Veterans Administration lenders. Reserves are recorded in accrued expenses and other liabilities on our Consolidated Balance Sheets.

Non-controlling Interests — Principal Equityholders — In the Reorganization Transactions immediately prior to the Company’s IPO, the existing holders of TMM Holdings limited partnership interests (the Principal Equityholders, members of management and the Board of Directors), exchanged their limited partnership interests for limited partnership interests of a newly formed limited partnership, New TMM (the “New TMM Units”). For each New TMM Unit received in the exchange, the Principal Equityholders, members of management and the Board of Directors also received, directly or indirectly, a corresponding number of shares of the Company’s Class B common stock, par value $0.00001 per share (the “Class B Common Stock”). All of the Company’s Class B Common Stock is owned by the Principal Equityholders, members of management and the Board of Directors. The Company’s Class B Common Stock has voting rights but no economic rights. One share of Class B Common Stock, together with one New TMM Unit is exchangeable into one share of the Company’s Class A Common Stock. The Company sold Class A Common Stock to the investing public in its initial public offering. The proceeds received in the initial public offering were used by the Company to purchase New TMM Units, such that the Company owns an amount of New TMM Units equal to the amount of the Company’s outstanding shares of Class A Common Stock. The Company’s Class A Common Stock has voting rights and economic rights. Also, in the Reorganization Transactions, the Company became the sole owner of the general partner of New TMM. As the general partner of New TMM, the Company exercises exclusive and complete control over New TMM. Consequently, the Company consolidates New TMM and records a non-controlling interest in its Consolidated Balance Sheet for the economic interests in New TMM, directly or indirectly, held by the Principal Equityholders, members of management and the Board of Directors.

 

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For the year-ended December 31, 2013, activity in the Non-controlling interests – Principal Equityholders and former controlling interests net income (loss) amounts is as follows (in thousands):

 

     Consolidated      Continuing
Operations
     Discontinued
Operations
 

Pre-IPO Non-controlling Interests – Principal Equityholders

   $ 123,532       $ 81,403       $ 42,129   

Post-IPO Controlling Interest

     (73,953      (82,845      8,892   
  

 

 

    

 

 

    

 

 

 

Non-controlling Interests – Principal Equityholders

$ 49,579    $ (1,442 $ 51,021   
  

 

 

    

 

 

    

 

 

 

Pre-IPO activity is for the period prior to April 10, 2013 while post-IPO is activity subsequent to that date. No similar reconciliation is needed for the year-ended December 31, 2014 as we were a publicly traded company for the entirety of the year.

Stock Based Compensation

We account for stock-based compensation in accordance with ASC Topic 718-10, “Compensation – Stock Compensation.” The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model. These models require the input of highly subjective assumptions. This guidance also requires us to estimate forfeitures in calculating the expense related to stock-based compensation.

Revenue Recognition:

Home closings revenue, net — Revenue from home sales are recorded using the completed-contract method of accounting at the time each home is closed, delivered, title and possession are transferred to the buyer, there is no significant continuing involvement with the home, risk of loss has transferred, and the buyer has demonstrated sufficient initial and continuing investment in the property. A home is considered closed when escrow closes and funds have transferred from the buyer or mortgage company to us.

We typically grant our homebuyers certain sales incentives, including cash discounts, incentives on options included in the home, option upgrades, and seller-paid financing or closing costs. Incentives and discounts are accounted for as a reduction in the sales price of the home and home closings revenue is shown net of discounts. For the years ended December 31, 2014, 2013 and 2012, discounts were $150.9 million, $129.0 million and $104.8 million, respectively. We also receive rebates from certain vendors and these rebates are accounted for as a reduction to cost of home closings.

Land closings revenue — Revenue from land sales are recognized when title is transferred to the buyer, there is no significant continuing involvement, and the buyer has demonstrated sufficient initial and continuing investment in the property sold. If the buyer has not made an adequate initial or continuing investment in the property, the profit on such sales is deferred until these conditions are met.

Mortgage operations revenue — Loan origination fees (including title fees, points, closing costs) are recognized at the time the related real estate transactions are completed, usually upon the close of escrow. All of the loans TMHF originates are sold to third party investors within a short period of time, within 20 business days, on a non-recourse basis. Gains and losses from the sale of mortgages are recognized in accordance with ASC Topic 860-20, “Sales of Financial Assets,” since TMHF does not have continuing involvement with the transferred assets, we derecognize the mortgage loans at time of sale, based on the difference between the selling price and carrying value of the related loans upon sale, recording a gain/loss on sale in the period of sale.

Advertising Costs — We expense advertising costs as incurred. Advertising costs were $26.1 million, $21.1 million and $12.1 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Recently Issued Accounting Pronouncements — In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one

 

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year after the date the financial statements are issued and provide related disclosures. ASU 2014-15 is effective for us for our fiscal year ending December 31, 2017. The adoption of ASU 2014-15 is not expected to have a material effect on our consolidated financial statements or disclosures.

In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (“ASU 2014-12”), which provides guidance on the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. ASU 2014-12 is effective beginning January 1, 2016. We do not anticipate that the adoption of ASU 2014-12 will have a material effect on our consolidated financial statements or disclosures.

In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (“ASU 2014-11”), which requires that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. ASU 2014-11 is effective beginning January 1, 2015. We do not anticipate that the adoption of ASU 2014-11 will have a material effect on our consolidated financial statements or disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU also supersedes some cost guidance included in ASC Subtopic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective beginning January 1, 2017 and, at that time we will adopt the new standard under either the full retrospective approach or the modified retrospective approach. Early adoption is not permitted. We are currently evaluating the method and impact the adoption of ASU 2014-09 will have our consolidated financial statements and disclosures.

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”), which changes the criteria for reporting discontinued operations while enhancing disclosures in this area. Pursuant to ASU 2014-08, only disposals representing a strategic shift, such as a major line of business, a major geographical area or a major equity investment, should be presented as a discontinued operation. If the disposal does qualify as a discontinued operation under ASU 2014-08, the entity will be required to provide expanded disclosures. ASU 2014-08 is effective beginning November 1, 2015. We plan to adopt this ASU when it becomes effective.

 

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3. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income available to TMHC by the weighted average number of Class A Common Stock outstanding during the period. Diluted earnings per share gives effect to the potential dilution that could occur if all shares of Class B Common Stock and their corresponding New TMM Units were exchanged for Class A Common Stock and if equity awards to issue common stock that are dilutive were exercised (in thousands, except per share amounts):

 

     Year Ended
December 31,
 
     2014     2013  

Numerator:

    

Net income available to TMHC – basic

   $ 71,469      $ 45,420   

Income from discontinued operations, net of tax

     41,902        66,513   

Income from discontinued operations, net of tax attributable to non-controlling interest – Principal Equityholders

     (30,594     (51,021
  

 

 

   

 

 

 

Net income from discontinued operations — basic

$ 11,308    $ 15,492   
  

 

 

   

 

 

 

Net income from continuing operations — basic

$ 60,161    $ 29,928   
  

 

 

   

 

 

 

Net income from continuing operations — basic

$ 60,161    $ 29,928   

Net income from continuing operations attributable to non-controlling interest – Principal Equityholders

  163,790      81,403   

Loss fully attributable to Class A Common Stock

  282      63  
  

 

 

   

 

 

 

Net income from continuing operations — diluted

$ 224,233    $ 111,394   
  

 

 

   

 

 

 

Net income from discontinued operations — diluted

$ 41,902    $ 57,620   
  

 

 

   

 

 

 

Denominator:

Weighted average shares — basic (Class A)

  32,937      32,840   

Weighted average shares — Principal Equityholders’ non-controlling interest (Class B)

  89,328      89,469   

Restricted stock units

  48      9   

Stock options

  —       1   
  

 

 

   

 

 

 

Weighted average shares — diluted

  122,313      122,319   

Earnings per common share — basic:

Income from continuing operations

$ 1.83    $ 0.91   

Discontinued operations, net of tax

$ 0.34    $ 0.47   
  

 

 

   

 

 

 

Net income available to Taylor Morrison Home Corporation

$ 2.17    $ 1.38   

Earnings per common share — diluted:

Income from continuing operations

$ 1.83    $ 0.91   

Discontinued operations, net of tax

$ 0.34    $ 0.47   
  

 

 

   

 

 

 

Net income available to Taylor Morrison Home Corporation

$ 2.17    $ 1.38   

We excluded a total weighted average of 1,281,959 and 1,439,645 stock options and time-vesting restricted stock units (“RSUs”) from the calculation of earnings per share for the year ended December 31, 2014 and 2013, respectively, as their inclusion is anti-dilutive.

The shares of Class B Common Stock have voting rights however, do not have economic rights, no rights to dividends or distribution on liquidation, and therefore, are not participating securities. Accordingly, Class B Common Stock is not included in basic earnings per share. Additionally, the income from Principal Equityholders’ non-controlling interest and the related Class B Common Stock may produce a slight anti-dilutive effect on diluted earnings per common share.

4. DISCONTINUED OPERATIONS

In connection with the decision to sell Monarch in December 2014, the operating results associated with the Monarch business are classified as discontinued operations – net of applicable taxes in the Consolidated Statements of Operations

 

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for all periods presented, and the assets and liabilities associated with this business are classified as assets of discontinued operations and liabilities of discontinued operations, as appropriate, in the Consolidated Balance Sheets for all applicable periods presented.

The components of discontinued operations, net of tax are as follows (in thousands):

 

     Year Ended December 31,  
     2014      2013      2012  

Revenues

   $ 395,070       $ 407,156       $ 394,539   
  

 

 

    

 

 

    

 

 

 

Pre-tax income from discontinued operations

$ 61,786    $ 93,391    $ 98,894   

Provision for taxes

  19,884      26,878      24,001   
  

 

 

    

 

 

    

 

 

 

Income from discontinued operations, net of tax

$ 41,902    $ 66,513