TMHC Q2 2015 10-Q

Taylor Morrison Home Corp (TMHC) SEC Quarterly Report (10-Q) for Q3 2015

TMHC 2015 10-K
TMHC Q2 2015 10-Q TMHC 2015 10-K

Table of Contents


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

ý

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

For the quarterly period ended September 30, 2015

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 Number: 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)

(480) 840-8100

(Registrant's telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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   ý     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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   ý     No   ¨

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


Large accelerated filer

ý

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   ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class

Outstanding as of November 4, 2015

Class A common stock, $0.00001 par value

33,158,855

Class B common stock, $0.00001 par value

89,108,569


Table of Contents


TAYLOR MORRISON HOME CORPORATION

TABLE OF CONTENTS

Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements of Taylor Morrison Home Corporation (Unaudited)

2

Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014

2

Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2015 and 2014

3

Condensed Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 2015 and 2014

4

Condensed Consolidated Statement of Stockholders' Equity for the nine month period ended September 30, 2015

5

Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2015 and 2014

6

Notes to the Unaudited Condensed Consolidated Financial Statements

7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3. Quantitative and Qualitative Disclosures About Market Risk

37

Item 4. Controls and Procedures

38

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

40

Item 1A. Risk Factors

40

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

40

Item 3. Defaults Upon Senior Securities

40

Item 4. Mine Safety Disclosures

40

Item 5. Other Information

40

Item 6. Exhibits

40

SIGNATURES

42


1

Table of Contents


PART I - FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS


TAYLOR MORRISON HOME CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


September 30,
2015

December 31,
2014

(Unaudited)

Assets

Cash and cash equivalents

$

158,279


$

234,217


Restricted cash

1,280


1,310


Real estate inventory:

Owned inventory

3,127,510


2,511,623


Real estate not owned under option agreements

1,683


6,698


Total real estate inventory

3,129,193


2,518,321


Land deposits

35,356


34,544


Mortgage loans held for sale

104,094


191,140


Prepaid expenses and other assets, net

118,220


89,210


Other receivables, net

128,131


85,274


Investments in unconsolidated entities

126,359


110,291


Deferred tax assets, net

252,341


258,190


Property and equipment, net

5,821


5,337


Intangible assets, net

4,896


5,459


Goodwill

57,698


23,375


Assets of discontinued operations

-


576,445


Total assets

$

4,121,668


$

4,133,113


Liabilities

Accounts payable

$

164,253


$

122,466


Accrued expenses and other liabilities

203,833


200,556


Income taxes payable

30,775


50,096


Customer deposits

101,997


70,465


Senior notes

1,250,000


1,388,840


Loans payable and other borrowings

145,589


147,516


Revolving credit facility borrowings

230,000


40,000


Mortgage warehouse borrowings

74,128


160,750


Liabilities attributable to consolidated option agreements

1,683


6,698


Liabilities of discontinued operations

-


168,565


Total liabilities

2,202,258


2,355,952


COMMITMENTS AND CONTINGENCIES (Note 17)



Stockholders' Equity

Class A common stock, $0.00001 par value, 400,000,000 shares authorized,

33,158,855 and 33,060,540 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively

-


-


Class B common stock, $0.00001 par value, 200,000,000 shares authorized,

89,108,569 and 89,227,416 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively

1


1


Preferred stock, $0.00001 par value, 50,000,000 shares authorized, no shares issued and outstanding as of September 30, 2015 and December 31, 2014

-


-


Additional paid-in capital

376,321


374,358


Retained earnings

158,330


114,948


Accumulated other comprehensive loss

(17,959

)

(10,910

)

Total stockholders' equity attributable to Taylor Morrison Home Corporation

516,693


478,397


Non-controlling interests – joint ventures

6,304


6,528


Non-controlling interests – Principal Equityholders

1,396,413


1,292,236


Total stockholders' equity

1,919,410


1,777,161


Total liabilities and stockholders' equity

$

4,121,668


$

4,133,113



See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements


2

Table of Contents


TAYLOR MORRISON HOME CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)


Three Months Ended
September 30,

Nine Months Ended
September 30,

2015

2014

2015

2014

Home closings revenue, net

$

779,190


$

615,736


$

1,955,170


$

1,653,890


Land closings revenue

5,782


5,027


22,712


19,919


Mortgage operations revenue

11,316


8,433


28,794


22,870


Total revenues

796,288


629,196


2,006,676


1,696,679


Cost of home closings

635,935


488,250


1,594,691


1,304,595


Cost of land closings

3,919


3,938


13,152


15,759


Mortgage operations expenses

6,962


5,057


18,120


13,641


Total cost of revenues

646,816


497,245


1,625,963


1,333,995


Gross margin

149,472


131,951


380,713


362,684


Sales, commissions and other marketing costs

53,482


41,432


136,724


114,362


General and administrative expenses

25,264


19,114


70,171


57,579


Equity in loss/(income) of unconsolidated entities

120


(1,231

)

(1,408

)

(3,468

)

Interest (income)/expense, net

(33

)

345


(165

)

1,127


Other expense, net

2,393


3,241


11,625


10,570


Loss on extinguishment of debt

-


-


33,317


-


Gain on foreign currency forward

-


-


(29,983

)

-


Income from continuing operations before income taxes

68,246


69,050


160,432


182,514


Income tax provision

22,452


19,541


54,434


50,602


Net income from continuing operations

45,794


49,509


105,998


131,912


Discontinued operations:

Income from discontinued operations

-


23,970


-


44,543


Transaction expenses from discontinued operations

-


-


(9,043

)

-


Gain on sale of discontinued operations

-


-


80,205


-


Income tax expense from discontinued operations

-


(7,304

)

(14,500

)

(13,485

)

Net income from discontinued operations

-


16,666


56,662


31,058


Net income before allocation to non-controlling interests

45,794


66,175


162,660


162,970


Net income attributable to non-controlling interests - joint ventures

(138

)

(47

)

(1,427

)

(386

)

Net income before non-controlling interests - Principal Equityholders

45,656


66,128


161,233


162,584


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

(33,312

)

(36,122

)

(76,470

)

(96,308

)

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

-


(12,160

)

(41,381

)

(22,682

)

Net income available to Taylor Morrison Home Corporation

$

12,344


$

17,846


$

43,382


$

43,594


Earnings per common share - basic:

Income from continuing operations

$

0.37


$

0.40


$

0.85


$

1.07


Income from discontinued operations - net of tax

$

-


$

0.14


$

0.46


$

0.26


Net income available to Taylor Morrison Home Corporation

$

0.37


$

0.54


$

1.31


$

1.33


Earnings per common share - diluted:

Income from continuing operations

$

0.37


$

0.40


$

0.85


$

1.07


Income from discontinued operations - net of tax

$

-


$

0.14


$

0.46


$

0.26


Net income available to Taylor Morrison Home Corporation

$

0.37


$

0.54


$

1.31


$

1.33


Weighted average number of shares of common stock:

Basic

33,122


32,956


33,088


32,896


Diluted

122,458


122,338


122,412


122,345



See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements


3

Table of Contents


TAYLOR MORRISON HOME CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, unaudited)


Three Months Ended
September 30,

Nine Months Ended
September 30,

2015

2014

2015

2014

Income before non-controlling interests, net of tax

$

45,794


$

66,175


$

162,660


$

162,970


Other comprehensive income (loss), net of tax:

Foreign currency translation adjustments, net of tax

(565

)

(19,656

)

(27,779

)

(19,238

)

Post-retirement benefits adjustments, net of tax

-


814


1,757


(966

)

Other comprehensive income (loss), net of tax

(565

)

(18,842

)

(26,022

)

(20,204

)

Comprehensive income

45,229


47,333


136,638


142,766


Comprehensive income attributable to non-controlling interests - joint ventures

(138

)

(47

)

(1,427

)

(386

)

Comprehensive income attributable to non-controlling interests - Principal Equityholders

(32,861

)

(34,534

)

(98,878

)

(104,246

)

Comprehensive income available to Taylor Morrison Home Corporation

$

12,230


$

12,752


$

36,333


$

38,134



See accompanying Notes to Unaudited Condensed Consolidated Financial Statements


4

Table of Contents


TAYLOR MORRISON HOME CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(In thousands, except share data, unaudited)


Common Stock

Class A

Class B

Additional

Paid-in

Capital

Shares

Amount

Shares

Amount

Amount

Retained

Earnings

Accumulated 

Other

Comprehensive

Income (Loss)

Non-controlling

Interest - Joint

Venture

Non-controlling

Interest - Principal

Equityholders

Total

Stockholders'

Equity

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


Net income

-


-


-


-


-


43,382


-


1,427


117,851


162,660


Other comprehensive loss

-


-


-


-


-


-


(7,049

)

-


(18,973

)

(26,022

)

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

87,055


-


(87,055

)

-


-


-


-


-


-


-


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

-


-


(31,792

)

-


-


-


-


-


-


-


Issuance of restricted stock units

11,260


-


-


-


-


-


-


-


-


-


Share based compensation

-


-


-


-


1,963


-


-


-


5,299


7,262


Distributions to non-controlling interests-joint ventures

-


-


-


-


-


-


-


(1,651

)

-


(1,651

)

Balance – September 30, 2015

33,158,855


$

-


89,108,569


$

1


$

376,321


$

158,330


$

(17,959

)

$

6,304


$

1,396,413


$

1,919,410



See accompanying Notes to Unaudited Condensed Consolidated Financial Statements


5

Table of Contents


TAYLOR MORRISON HOME CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)


Nine Months Ended September 30,

2015

2014

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income before allocation to non-controlling interests

$

162,660


$

162,970


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

Equity in income of unconsolidated entities

(1,408

)

(22,497

)

Stock compensation expense

5,723


4,327


Loss on extinguishment of debt

33,317


-


Distributions of earnings from unconsolidated entities

1,879


21,675


Depreciation and amortization

2,927


3,958


Net income from discontinued operations

(56,662

)

-


Gain on foreign currency forward

(29,983

)

-


Contingent consideration

7,916


-


Deferred income taxes

5,849


(3,771

)

Changes in operating assets and liabilities:

Real estate inventory and land deposits

(430,964

)

(521,840

)

Mortgage loans held for sale, prepaid expenses and other assets

2,086


(48,591

)

Customer deposits

29,728


18,697


Accounts payable, accrued expenses and other liabilities

15,128


41,379


Income taxes payable

(19,909

)

(27,316

)

Net cash used in operating activities

(271,713

)

(371,009

)

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property and equipment

(1,753

)

(2,746

)

Payments for business acquisitions

(220,899

)

-


Distribution from unconsolidated entities

6,857


1,753


Decrease in restricted cash

30


11,261


Investments of capital into unconsolidated entities

(23,397

)

(81,494

)

Proceeds from sale of discontinued operations

268,853


-


Proceeds from settlement of foreign currency forward

29,983


-


Net cash provided by (used in) investing activities

59,674


(71,226

)

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings on lines of credit related to mortgage borrowings

595,451


348,491


Repayment on lines of credit related to mortgage borrowings

(682,073

)

(374,810

)

Proceeds from loans payable and other borrowings

33,081


32,520


Repayments of loans payable and other borrowings

(35,008

)

(157,366

)

Borrowings on revolving credit facility

325,000


203,000


Payments on revolving credit facility

(135,000

)

(53,000

)

Proceeds from the issuance of senior notes

350,000


350,000


Repayments on senior notes

(513,608

)

-


Deferred financing costs

(4,538

)

(6,255

)

Payment of contingent consideration

(3,050

)

-


Distributions to non-controlling interests of consolidated joint ventures

(1,651

)

(740

)

Net cash (used in) provided by financing activities

(71,396

)

341,840


EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

(20,491

)

(7,258

)

NET DECREASE IN CASH AND CASH EQUIVALENTS

$

(303,926

)

$

(107,653

)

CASH AND CASH EQUIVALENTS - Beginning of period (1)

462,205


389,181


CASH AND CASH EQUIVALENTS - End of period

$

158,279


$

281,528


SUPPLEMENTAL CASH FLOW INFORMATION:

Income taxes paid, net

$

81,664


$

94,162


SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:

Increase (decrease) in loans payable issued to sellers in connection with land purchase contracts

$

11,943


$

(80,864

)

Accrual of contingent consideration

$

3,200


$

-


Non-cash portion of loss on debt extinguishment

$

5,102


$

-


Decrease in income taxes payable and related tax indemnification receivable from seller

$

-


$

167


(1) Cash and cash equivalents shown here includes the cash related to Monarch. At December 31, 2014, cash held at Monarch was $227,988.


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements


6

Table of Contents


TAYLOR MORRISON HOME CORPORATION

NOTES TO THE UNAUDITED CONDENSED 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, Georgia, Illinois, North Carolina, and Texas. Our homes appeal to entry-level, move-up, 55+ and luxury homebuyers. The Company operates primarily under our Taylor Morrison and Darling Homes brands. Our business has 15 homebuilding operating divisions, and a mortgage operations division, which are organized into three reportable segments: East, West, and Mortgage Operations. The communities in our East and West segments 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 through our wholly owned mortgage subsidiary, 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 predecessor, Taylor Woodrow Holdings (USA), Inc., now known as Taylor Morrison Communities, Inc ("TMC").


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 September 30, 2015 and December 31, 2014, the Principal Equityholders owned 72.9% of the Company.


On January 28, 2015 we closed on the sale of Monarch Corporation, our former Canadian operating segment ("Monarch"). As a result of the sale, we do not have significant continuing involvement with Monarch. See Note 4 - Discontinued Operations for further information.


On April 30, 2015, we acquired JEH Homes, an Atlanta based homebuilder, for a purchase price of approximately $63.2 million , excluding contingent consideration. In addition, on July 21, 2015, we acquired three divisions of Orleans Homes for a purchase price of approximately $ 167.3 million . See Note 2 – Summary of Significant Accounting Policies for further information regarding the assets acquired and the preliminary allocation of purchase price for both transactions.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation  - The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our 2014 Annual Report on Form 10-K. In the opinion of management, the accompanying Condensed Consolidated Financial Statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for a full fiscal year.


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 Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Stockholders' Equity.


Discontinued Operations – As a result of our decision in December 2014 to dispose of Monarch, the operating results and financial position of the Monarch business are presented as discontinued operations for all periods presented.



7

Table of Contents


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, the Company consolidates New TMM and records a non-controlling interest in the Condensed 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.


Purchase Price Allocation and Related Acquisition Accounting  - On April 30, 2015 , we acquired JEH Homes, an Atlanta based homebuilder, for a purchase price of approximately $63.2 million , excluding contingent consideration. On July 21, 2015, we completed the acquisition of the Charlotte, Raleigh, and Chicago divisions of Orleans Homes for a purchase price of approximately $167.3 million , consisting of $ 162.3 million of cash and $ 5.0 million of seller financing. In accordance with ASC Topic 805 , Business Combinations , the effects of the acquisitions were reflected on the date of the transactions in the financial statements of the acquired businesses by allocating purchase price and recording the assets at their fair values in order to reflect the purchase price paid, which resulted in goodwill for each acquisition.


For both acquisitions, we determined the fair value of real estate inventory on a community-by-community basis primarily using the sales comparison and income approaches. The sales comparison approach was used for all inventory in process. The income approach derives a value using a discounted cash flow for income-producing real property. This approach was used exclusively for finished lots. The income approach using discounted cash flows was also used to value lot option contracts acquired.


These estimated cash flows and ultimate valuation are significantly affected by the discount rate, estimates related to expected average selling prices and sales incentives, expected sales paces and cancellation rates, expected land development and construction timelines, and anticipated land development, construction, overhead costs and may vary significantly between communities.


The Company has completed a preliminary allocation of purchase price as of September 30, 2015 and expects to finalize the allocation within one year from the date of each acquisition. The following is a summary of the fair value of assets acquired, liabilities assumed, and liabilities created as of September 30, 2015 (in thousands):


JEH Homes

Orleans Homes

Total

Acquisition Date

April 30, 2015

July 21, 2015

Assets Acquired

Real estate inventory

$

55,559


$

140,602


$

196,161


Land deposits

-


2,236


$

2,236


Prepaid expenses and other assets

1,301


2,436


$

3,737


Property and equipment

395


623


$

1,018


Goodwill

9,125


25,198


$

34,323


Total assets

66,380


171,095


237,475


Less Liabilities Assumed

Accrued expenses and other liabilities

-


2,700


2,700


Customer deposits

-


1,081


1,081


Less contingent consideration

$

3,200


$

-


$

3,200


Net Assets Acquired

63,180


167,314


230,494





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 Condensed Consolidated Financial Statements and accompanying notes. Significant estimates include real estate development costs to complete, valuation of real estate, valuation of acquired assets, 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.



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Non-controlling Interests – Principal Equityholders – Immediately prior to our IPO, as part of the Reorganization Transactions, the existing holders of TMM Holdings' limited partnership interests exchanged their limited partnership interests for limited partnership interests of New TMM ("New TMM Units"). For each New TMM Unit received in the exchange, the holders of New TMM Units also received a corresponding number of shares of our Class B Common Stock (the "Class B Common Stock"). Our 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 our Class A Common Stock in accordance with the terms of the Exchange Agreement, dated as of April 9, 2013, among the Company, New TMM and the holders of Class B Common Stock and New TMM Units.


Stock Based Compensation - We account for stock-based compensation in accordance with ASC Topic 718-10, Compensation – Stock Compensation. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model. We use a Monte Carlo model for the valuation of our restricted stock grants that have a market condition. These models require the input of subjective assumptions. This guidance also requires us to estimate forfeitures in calculating the expense related to stock-based compensation.


Recently Issued Accounting Pronouncements  - In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"), which changes the presentation of debt issuance costs in financial statements. Under this ASU, such costs are presented in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs continues to be reported as interest expense. ASU 2015-03 will be effective for us in our fiscal year beginning January 1, 2016. The adoption of ASU 2015-03 is not expected to have a material effect on our condensed consolidated financial statements or disclosures.


In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis ("ASU 2015-02"). ASU 2015-02 amends the consolidation requirements and changes the required consolidation analysis. ASU 2015-02 requires management to reevaluate all legal entities under a revised consolidation model specifically to (i) modify the evaluation of whether limited partnership and similar legal entities are variable interest entities ("VIEs"), (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with VIEs particularly those that have fee arrangements and related party relationships, and (iv) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU 2015-02 will be effective for us for our fiscal year beginning January 1, 2016. The adoption of ASU 2015-02 is not expected to have a material effect on our condensed 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 generally 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 has been deferred and will be effective beginning January 1, 2018 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 on our condensed consolidated financial statements or disclosures.

3. EARNINGS PER SHARE

Basic earnings per common 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.

The following is a summary of the components of basic and diluted earnings per share (in thousands, except per share amounts):



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Three Months Ended
September 30,

Nine Months Ended
September 30,

2015

2014

2015

2014

Numerator:

Net income available to TMHC – basic

$

12,344


$

17,846


$

43,382


$

43,594


Income from discontinued operations, net of tax

-


16,666


56,662


31,058


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

-


(12,160

)

(41,381

)

(22,682

)

Net income from discontinued operations – basic

$

-


$

4,506


$

15,281


$

8,376


Net income from continuing operations – basic

$

12,344


$

13,340


$

28,101


$

35,218


Net income from continuing operations – basic

$

12,344


$

13,340


$

28,101


$

35,218


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

33,312


36,122


76,470


96,308


Loss fully attributable to public holding company

5


26


234


270


Net income from continuing operations – diluted

$

45,661


$

49,488


$

104,805


$

131,796


Net income from discontinued operations – diluted

$

-


$

16,666


$

56,662


$

31,058


Denominator:

Weighted average shares – basic (Class A)

33,122


32,956


33,088


32,896


Weighted average shares – Principal Equityholders' non-controlling interest (Class B)

89,158


89,330


89,188


89,405


Restricted stock units

178


52


136


44


Stock Options

-


-


-


-


Weighted average shares – diluted

122,458


122,338


122,412


122,345


Earnings per common share – basic:

Income from continuing operations

$

0.37


$

0.40


$

0.85


$

1.07


Income from discontinued operations, nets of tax

$

-


$

0.14


$

0.46


$

0.26


Net income available to Taylor Morrison Home Corporation

$

0.37


$

0.54


$

1.31


$

1.33


Earnings per common share – diluted:

Income from continuing operations

$

0.37


$

0.40


$

0.85


$

1.07


Income from discontinued operations, net of tax

$

-


$

0.14


$

0.46


$

0.26


Net income available to Taylor Morrison Home Corporation

$

0.37


$

0.54


$

1.31


$

1.33


We excluded a total weighted average of 1,531,404 and 1,543,056 stock options and restricted stock units ("RSUs") and 1,294,149 and 1,267,665 stock options and RSUs from the calculation of earnings per share for the three and nine months ended September 30, 2015 and 2014 , respectively, as their inclusion would be anti-dilutive.

The shares of Class B Common Stock have voting rights but do not have economic rights or rights to dividends or distributions 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 of the Monarch business are classified as discontinued operations – net of applicable taxes in the Condensed Consolidated Statements of Operations 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 Condensed Consolidated Balance Sheets for all applicable periods presented.


In the three and nine months ended September 30, 2015 , we did no t record any revenues or expenses related to the operations of Monarch. The activity recorded in 2015 consists of post-closing transaction expenses, including administrative costs, legal fees, and stock based compensation charges. The gain on sale of discontinued operations was determined using the purchase price of Monarch, less related costs and tax. In the three and nine months ended September 30, 2014 we recorded $129.8 million and $239.3 million , respectively, of revenues related to Monarch, which is included in discontinued operations.


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The components of assets and liabilities of discontinued operations at December 31, 2014 are as follows (in thousands):


Cash and cash equivalents

$

227,988


Restricted cash

11,474


Real estate inventory

149,087


Land deposits

7,547


Loans receivable

40,808


Tax indemnification receivable

5,194


Prepaid expenses and other assets, net

11,197


Other receivables, net

1,984


Investments in unconsolidated entities

111,887


Deferred tax assets, net

3,233


Property and equipment, net

2,546


Intangible assets, net

3,500


Total assets of discontinued operations

$

576,445


Accounts payable

$

14,438


Accrued expenses and other liabilities

44,554


Income taxes payable

8,076


Customer deposits

11,166


Loans payable and other borrowings

90,331


Total liabilities of discontinued operations

$

168,565


5. DERIVATIVE FINANCIAL INSTRUMENT

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 in the amount of $30.0 million was recorded to gain on foreign currency forward in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2015 .

6. REAL ESTATE INVENTORY AND LAND DEPOSITS

In accordance with the provisions of ASC Topic 360, Property, Plant, and Equipment , we review our real estate inventory for indicators of impairment on a community by community basis during each reporting period. In conducting the review for indicators of impairment, we evaluate, among other things, 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. For the three and nine months ended September 30, 2015 and 2014 , we recorded no impairment charges on real estate assets.


In the ordinary course of business, we enter into various specific performance contracts to acquire lots. Real estate not owned under these contracts is consolidated into real estate inventory with a corresponding liability in liabilities attributable to consolidated option agreements in the Condensed Consolidated Balance Sheets.


Inventory consists of the following (in thousands):



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As of

September 30, 2015

December 31, 2014

Operating communities, including capitalized interest

$

2,924,713


$

2,217,067


Real estate held for development or held for sale

202,797


294,556


Total owned inventory

3,127,510


2,511,623


Real estate not owned under option contracts

1,683


6,698


Total real estate inventory

$

3,129,193


$

2,518,321



The development status of our land inventory is as follows (dollars in thousands):

As of

September 30, 2015

December 31, 2014

Owned Lots

Book Value of Land

and Development

Owned Lots

Book Value of Land

and Development

Raw

8,642


$

397,590


9,825


$

464,882


Partially developed

8,209


551,794


8,680


654,759


Finished

12,673


1,314,693


8,727


787,033


Long-term strategic assets

3,264


14,730


3,564


27,993


Total

32,788


$

2,278,807


30,796


$

1,934,667



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.


As of September 30, 2015 and December 31, 2014 , we had the right to purchase 9,578 and 5,372 lots under land option purchase contracts, respectively, which represents an aggregate purchase price of $798.1 million and $323.5 million as of September 30, 2015 and December 31, 2014 , respectively. We do not have title to the property and the creditors generally have no recourse against the Company. As of September 30, 2015 and December 31, 2014, our exposure to loss related to our option contracts with third parties and unconsolidated entities consists of non-refundable option deposits totaling $35.4 million and $34.5 million , respectively, in land deposits related to land options and land purchase contracts.


For the three and nine months ended September 30, 2015 and 2014 , no impairment of option deposits or capitalized pre-acquisition costs were recorded. We continue to evaluate the terms of open land option and purchase contracts and may impair option deposits and capitalized pre-acquisition costs in the future.


Capitalized Interest - Interest capitalized, incurred and amortized is as follows (in thousands):


Three Months Ended
September 30,

Nine Months Ended
September 30,

2015

2014

2015

2014

Interest capitalized - beginning of period

$

106,470


$

87,227


$

94,880


$

71,263


Interest incurred

22,401


25,167


70,708


65,619


Interest amortized to cost of home closings

(21,886

)

(15,227

)

(58,603

)

(39,715

)

Interest capitalized - end of period

$

106,985


$

97,167


$

106,985


$

97,167


7. INVESTMENTS IN UNCONSOLIDATED ENTITIES

We participate in a number of joint ventures with related and unrelated third parties, with ownership interests up to 50.0% . These entities are generally involved in real estate development, homebuilding and mortgage lending activities.

Summarized, unaudited financial information of unconsolidated entities that are accounted for by the equity method is as follows (in thousands):


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As of

September 30, 2015

December 31,
2014

Assets:

Real estate inventory

$

562,320


$

396,858


Other assets

102,413


59,963


Total assets

$

664,733


$

456,821


Liabilities and owners' equity:

Debt

$

234,101


$

129,561


Other liabilities

16,500


8,870


Total liabilities

250,601


138,431


Owners' equity:

TMHC

126,359


110,291


Others

287,773


208,099


Total owners' equity

414,132


318,390


Total liabilities and owners' equity

$

664,733


$

456,821



Three Months Ended
September 30,

Nine Months Ended
September 30,

2015

2014

2015

2014

Revenues

$

2,206


$

4,805


$

19,430


$

13,468


Costs and expenses

(2,242

)

(3,046

)

(15,980

)

(7,100

)

(Loss)/Income of unconsolidated entities

$

(36

)

$

1,759


$

3,450


$

6,368


Company's share in (loss)/income of unconsolidated entities

$

(120

)

$

1,231


$

1,408


$

3,468


Distributions of earnings from unconsolidated entities

$

442


$

998


$

8,736


$

2,749



We have investments in, and advances to, a number of joint ventures with related and unrelated parties to develop land and to develop housing communities, including for-sale residential homes. Some of these joint ventures develop land for the sole use of the venture participants, including us, and others develop land for sale to the joint venture participants and to unrelated builders. Our share of the joint venture profit relating to lots we purchase from the joint ventures is deferred until homes are delivered by us and title passes to a homebuyer.

8. ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consist of the following (in thousands):


As of
September 30, 2015

As of
December 31, 2014

Real estate development costs to complete

$

15,815


$

24,222


Compensation and employee benefits

43,753


51,475


Self-insurance and warranty reserves

43,923


44,595


Interest payable

25,572


22,033


Property and sales taxes payable

16,290


12,808


Other accruals

58,480


45,423


Total accrued expenses and other liabilities

$

203,833


$

200,556



Self-Insurance and Warranty Reserves – A summary of the changes in our reserves are as follows (in thousands):


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Three Months Ended
September 30,

Nine Months Ended
September 30,

2015

2014

2015

2014

Reserve - beginning of period

$

42,589


$

40,287


$

44,595


$

34,814


Additions to reserves

5,629


6,113


13,143


13,820


Costs and claims incurred

(5,032

)

(4,897

)

(16,482

)

(11,957

)

Change in estimates to pre-existing reserves

737


(1,195

)

2,667


3,631


Reserve - end of period

$

43,923


$

40,308


$

43,923


$

40,308


9. DEBT

Total debt consists of the following (in thousands):

As of

(Dollars in thousands)

September 30, 2015

December 31, 2014

7.75% Senior Notes due 2020, unsecured, with $8.9 million of unamortized debt issuance costs and $3.4 million of unamortized bond premium at December 31, 2014

$

-


$

488,840


5.25% Senior Notes due 2021, unsecured, with $6.6 million and $7.5 million of unamortized debt issuance costs at September 30, 2015 and December 31, 2014, respectively

550,000


550,000


5.875% Senior Notes due 2023, unsecured, with $4.3 million of unamortized debt issuance costs at September 30, 2015

350,000


-


5.625% Senior Notes due 2024, unsecured, with $4.5 million and $4.9 million of unamortized debt issuance costs at September 30, 2015 and December 31, 2014, respectively

350,000


350,000


Senior Notes subtotal

$

1,250,000


$

1,388,840


Loans payable and other borrowings

145,589


147,516


$500.0 million Revolving Credit Facility with $5.4 million and $5.6 million of unamortized debt issuance costs at September 30, 2015 and December 31, 2014, respectively

230,000


40,000


Mortgage warehouse borrowings

74,128


160,750


Total Senior Notes and bank financing

$

1,699,717


$

1,737,106



2020 Senior Notes

Our 7.75% Senior Notes due 2020 (the "2020 Senior Notes") were redeemed in full on May 1, 2015 using the net proceeds from an issuance of new senior unsecured notes, the 2023 Senior Notes (as defined below), together with cash on hand. See 2023 Senior Notes and Redemption of 2020 Senior Notes below for additional information regarding the redemption of the 2020 Senior Notes.


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 mature on April 15, 2021. The 2021 Senior Notes are guaranteed by TMM Holdings, Taylor Morrison Holdings, Inc., Taylor Morrison Communities II, Inc. and the U.S. homebuilding subsidiaries of TMC (collectively, the "Guarantors"). The 2021 Senior Notes and the guarantees are senior unsecured obligations and are not subject to registration rights. The indenture for the 2021 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 2021 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 2021 Senior Notes at par (plus accrued and unpaid interest) with such proceeds. We are also required to offer to repurchase the 2021 Senior Notes at a price equal to 101% of their aggregate principal amount (plus accrued and unpaid interest) upon certain change of control events.


There are no financial maintenance covenants for the 2021 Senior Notes.



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2023 Senior Notes and Redemption of 2020 Senior Notes

On April 16, 2015, we issued $350.0 million aggregate principal amount of 5.875% Senior Notes due 2023 (the "2023 Senior Notes"). The 2023 Senior Notes are unsecured and are not subject to registration rights. The net proceeds of the offering, together with cash on hand, were used to redeem the entire remaining $485.4 million aggregate principal amount of 7.75% 2020 Senior Notes on May 1, 2015, at a redemption price of 105.813% of their aggregate principal amount, plus accrued and unpaid interest thereon to, but not including, the date of redemption. As a result of the redemption of the 2020 Senior Notes, we recorded a loss on extinguishment of debt of $33.3 million , which included the payment of the redemption premium and write-off of net unamortized deferred financing fees.


The 2023 Senior Notes mature on April 15, 2023 . The 2023 Senior Notes are guaranteed by the same Guarantors that guarantee the 2021 Senior Notes. The 2023 Senior Notes and the guarantees are senior unsecured obligations. The indenture governing the 2023 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 2023 Senior Notes contains events of default that are similar to those contained in the indenture governing the 2021 Senior Notes. The change of control provisions in the indenture governing the 2023 Senior Notes are similar to those contained in the indenture governing 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 2023 Senior Notes.


Prior to January 15, 2023, the 2023 Senior Notes are redeemable at a price equal to 100% plus a "make-whole" premium for payments through January 15, 2023 (plus accrued and unpaid interest). Beginning January 15, 2023, the 2023 Senior Notes are redeemable at par (plus accrued and unpaid interest).


There are no financial maintenance covenants for the 2023 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 net proceeds from the issuance of the 2024 Senior Notes were used to repay the outstanding balance under the 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 2021 Senior Notes. The 2024 Senior Notes and the guarantees are senior unsecured obligations and are not subject to registration rights. 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 indenture governing the 2021 Senior Notes. The change of control provisions in the indenture governing the 2024 Senior Notes are similar to those contained in the indenture governing 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).


There are no financial maintenance covenants for the 2024 Senior Notes.


Revolving Credit Facility

On April 24, 2015, we entered into Amendment No. 3 to the Revolving Credit Facility. Among other things, this amendment increased the amount available under the Revolving Credit Facility to $500.0 million , extended the maturity of the Revolving Credit Facility to April 12, 2019 and reduced certain margins payable thereunder. The Revolving Credit Facility is guaranteed by the same Guarantors that guarantee the 2021 Senior Notes.


The Revolving Credit Facility contains certain "springing" financial covenants, requiring us and our subsidiaries to comply with a maximum debt to capitalization ratio of not more than 0.60 to 1.00 and a minimum consolidated tangible net worth level of at least $1.4 billion . The financial covenants would be in effect for any fiscal quarter during which any (a) loans under the 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 Revolving Credit Facility in an aggregate amount greater than $40.0 million or unreimbursed letters of credit issued under the Revolving Credit Facility are outstanding on the last day of such fiscal quarter or for more than five consecutive days during such fiscal quarter.


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For purposes of determining compliance with the financial covenants for any fiscal quarter, the Revolving Credit Facility provides that we may exercise an equity cure by issuing certain permitted securities for cash or otherwise recording cash contributions to our 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. Our debt to total capitalization ratio at September 30, 2015 was 0.44 to 1.00. At September 30, 2015 , our tangible net worth, as defined in the Revolving Credit Facility, was $1.9 billion .


The 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 on prepayment of subordinated indebtedness and limitations on fundamental changes. The 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 September 30, 2015 , we were in compliance with all of the covenants under the Revolving Credit Facility.



Mortgage Borrowings

The following is a summary of our mortgage subsidiary borrowings (in thousands):


As of September 30, 2015

Facility

Amount Drawn

Facility Amount

Interest Rate

Expiration Date

Collateral (1)

Flagstar

$

25,451


$

55,000


LIBOR + 2.5%

30 days written notice

Mortgage Loans

Comerica

-


50,000


LIBOR + 2.75%

November 17, 2015

Mortgage Loans

J.P. Morgan

48,677


100,000


(2)

September 26, 2016

Pledged Cash

Total

$

74,128


$

205,000


As of 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

J.P. Morgan

86,426


100,000


(2)

September 28, 2015

Pledged Cash

Total

$

160,750


$

235,000


(1)

The mortgage borrowings outstanding as of September 30, 2015 and December 31, 2014 , are collateralized by $104.1 million and $191.1 million , respectively, of mortgage loans held for sale, which comprise the balance of mortgage loans held for sale and $1.3 million and $1.3 million , respectively, of restricted short-term investments which are included in restricted cash in the accompanying Condensed Consolidated Balance Sheets.

(2)

As of December 31, 2014 and through the date of expiration of September 28, 2015, interest under the J.P. Morgan agreement ranged from 2.375% plus 30-day LIBOR to 2.875% plus 30-day LIBOR or 0.25% (whichever was greater). The agreement was renewed in September 2015 setting the interest rate at 2.375% plus 30-day LIBOR.



Loans Payable and Other Borrowings

Loans payable and other borrowings as of September 30, 2015 and December 31, 2014 consist of project-level debt due to various land sellers and seller financing notes from current and prior year acquisitions. Project-level debt is generally secured by the land that was acquired and the principal payments generally coincide with corresponding project lot sales or a principal reduction schedule. Loans payable bear interest at rates that ranged from 0% to 8% at September 30, 2015 and December 31, 2014 . We impute interest for loans with no stated interest rates. The weighted average interest rate on $110.9 million of the loans as of September 30, 2015 was 5.4%  per annum, and $34.7 million of the loans were non-interest bearing.


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10. FAIR VALUE DISCLOSURES

We have adopted ASC Topic 820, Fair Value Measurements, for valuation of financial instruments. ASC Topic 820 provides a framework for measuring fair value under GAAP, expands disclosures about fair value measurements, and establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the fair value hierarchy are summarized as follows:


Level 1  - Fair value is based on quoted prices for identical assets or liabilities in active markets.


Level 2  - Fair value is determined using quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active or are directly or indirectly observable.


Level 3  - Fair value is determined using one or more significant inputs that are unobservable in active markets at the measurement date, such as a pricing model, discounted cash flow, or similar technique.


The fair value of our mortgage loans held for sale is derived from negotiated rates with partner lending institutions. The fair value of our mortgage borrowings, loans payable and other borrowings and the borrowings under our Revolving Credit Facility approximate carrying value due to their short term nature and variable interest rate terms. The fair value of our Senior Notes is derived from quoted market prices by independent dealers in markets that are not active. The fair value of the contingent consideration liability related to previous acquisitions was estimated by discounting to present value the contingent payments expected to be made for each acquisition based on a probability-weighted scenario approach. As the measurement of the contingent consideration is based primarily on significant inputs not observable in the market, it represents a Level 3 measurement. The carrying value and fair value of our financial instruments are as follows (in thousands):


September 30, 2015

December 31, 2014

Level in Fair

Value Hierarchy

Carrying

Value

Estimated

Fair

Value

Carrying

Value

Estimated

Fair

Value

Description:

Mortgage loans held for sale

2

$

104,094


$

104,094


$

191,140


$

191,140


Mortgage borrowings

2

74,128


74,128


160,750


160,750


Loans payable and other borrowings

2

145,589


145,589


147,516


147,516


7.75% Senior Notes due 2020

2

-


-


488,840


518,170


5.25% Senior Notes due 2021

2

550,000


545,875


550,000


539,000


5.875% Senior Notes due 2023

2

350,000


350,000


-


-


5.625% Senior Notes due 2024

2

350,000


336,000


350,000


336,000


Revolving Credit Facility

2

230,000


230,000


40,000


40,000


Contingent consideration liability

3

23,797


23,797


17,932


17,932


11. INCOME TAXES

The effective tax rate for the three and nine months ended September 30, 2015 and 2014 was based on the federal statutory income tax rates, affected by state income taxes, changes in deferred tax assets, changes in valuation allowances, and certain preferential treatment of deductions relating to homebuilding activities.


As of September 30, 2015 , cumulative gross unrecognized tax benefits were $7.2 million , and all unrecognized tax benefits, if recognized, would affect the effective tax rate. As of December 31, 2014 , cumulative gross unrecognized tax benefits were $2.4 million . These amounts are partially included in deferred tax assets and income taxes payable in the accompanying Condensed Consolidated Balance Sheets at September 30, 2015 and December 31, 2014 . None of the unrecognized tax benefits are expected to reverse in the next 12 months.


In accordance with ASC Topic 740-10, Income Taxes , we assess whether a valuation allowance should be established based on the consideration of available evidence using a "more likely than not" standard with significant weight being given to evidence that can be objectively verified. This assessment includes a review of both positive and negative evidence including our earnings history, forecasts and future profitability, assessment of the industry, the length of statutory carry-forward periods, experiences of utilizing net operating losses and built-in losses, and tax planning alternatives.


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12. STOCKHOLDERS' EQUITY

Capital Stock - Holders of 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. The voting power of the outstanding Class B Common Stock (expressed as a percentage of the total voting power of all common stock) is equal to the percentage of partnership interests in New TMM not held directly or indirectly by TMHC.


The components and respective voting power of our outstanding Common Stock at September 30, 2015 are as follows:


Shares

Outstanding

Percentage

Class A Common Stock

33,158,855


27.1

%

Class B Common Stock

89,108,569


72.9

%

Total

122,267,424


100

%

13. STOCK BASED COMPENSATION

Equity-Based Compensation

In April 2013, we adopted the Taylor Morrison Home Corporation 2013 Omnibus Equity Award Plan (the "Plan"). The Plan provides for the grant of stock options, restricted stock units and other equity awards based on our common stock. As of
September 30, 2015 we had an aggregate of 5,819,833 shares of Class A Common Stock available for future grants under the Plan.


The following table provides information regarding the amount and components of stock-based compensation expense, which is included in general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations (in thousands):


Three Months Ended
September 30,

Nine Months Ended
September 30,

2015

2014

2015

2014

Restricted Stock Units (RSUs) (1)

$

964


$

335


$

2,389


$

944


Stock options

779


753


3,577


2,153


New TMM Units

384


419


1,296


1,230


Total stock compensation (2)

$

2,127


$

1,507


$

7,262


$

4,327


(1)

Includes compensation expense related to restricted stock units and performance based restricted stock units.

(2)

Included in the table above for the nine months ended September 30, 2015 is $ 1.5 million of stock compensation expense related to the acceleration of vesting for equity awards held by Monarch employees. The sale of Monarch triggered a change in control provision provided for in the respective award agreements and plan document. The expense related to the acceleration of awards is included in transaction expenses from discontinued operations in the accompanying Condensed Consolidated Statement of Operations for the nine months ended September 30, 2015 .


At September 30, 2015 and December 31, 2014 , the aggregate unrecognized value of all outstanding stock-based compensation awards was approximately $18.9 million and $16.0 million , respectively.


Restricted Stock – The following table summarizes the restricted stock unit and performance-based restricted stock unit activity for the nine month period:


18

Table of Contents


Shares

Weighted Average

Grant Date Fair

Value

Balance at December 31, 2014

185,679


$

24.19


Granted

445,485


18.46


Vested

(11,260

)

22.98


Forfeited

(12,614

)

22.29


Balance at September 30, 2015

607,290


$

20.03



During the three and nine months ended September 30, 2015 , we issued non-performance RSU awards and performance-based RSU awards to certain employees of the Company. The new non-performance RSU awards vest with respect to 33.3% on the second, third and fourth anniversaries of the grant date. The performance-based RSU awards will cliff-vest based on the achievement of certain performance goals set by the Company in the year of grant over a three years performance period, subject to the employee's continued employment through the last date of the performance period and will be settled in shares of our Class A Common Stock. The number of shares underlying the performance-based RSUs that will be issued to the recipients may range from the target award amount depending on actual performance achieved as compared to the target.


Stock Options – The following table summarizes the stock option activity for the nine months ended September 30, 2015:

Shares

Weighted

Average Exercise

Price Per Share

Outstanding at December 31, 2014

1,325,029


$

22.35


Granted

400,258


18.78


Exercised

-


-


Canceled/Forfeited

(211,397

)

24.69


Outstanding at September 30, 2015

1,513,890


$

21.08


Options exercisable at September 30, 2015

273,293


$

21.98



During the three and nine months ended September 30, 2015 , we issued stock options to certain employees. These stock options granted vest 25% on the first four anniversaries of the grant date.


New TMM Units – Certain members of management and certain members of the Board of Directors were issued Class M partnership units in TMM Holdings. Those units were subject to both time and performance vesting conditions. In addition, TMM Holdings issued phantom Class M Units to certain employees who resided in Canada, which are treated as Class M Units for the purposes of this description and the financial statements. In connection with the sale of Monarch, all of the phantom Class M Units were settled pursuant to change in control provisions provided for in the award agreement. In the nine months ended September 30, 2015 , we paid $1.4 million in settlement of these awards, however there was no activity for the three months ended September 30, 2015 .


Pursuant to the Reorganization Transactions, the time-vesting Class M Units in TMM Holdings were exchanged for New TMM Units with vesting terms substantially the same as the Class M Units surrendered for exchange. One New TMM Unit together with a corresponding share of Class B Common Stock is exchangeable for one share of Class A Common Stock. The shares of Class B Common Stock/New TMM Units outstanding as of September 30, 2015 were as follows:


Shares/New

TMM Units

Weighted

Average Grant  Date

Fair Value

Balance at December 31, 2014

1,431,721


$

5.11


Granted

-


-


Exchanges (1)

(87,055

)

3.88


Forfeited (2)

(31,792

)

5.24


Balance at September 30, 2015

1,312,874


$

5.45


(1)

Exchanges during the period represent the exchange of a vested New TMM Unit along with the corresponding share of Class B Common Stock for a newly issued share of Class A Common Stock.

(2)

Awards forfeited during the period represent the unvested portion of New TMM Unit awards for employees who have terminated employment with the Company and for which the New TMM Unit and the corresponding Class B Share have been canceled.


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Table of Contents


14. RELATED-PARTY TRANSACTIONS

From time to time, we may engage in transactions with entities or persons that are affiliated with us or one or more of the Principal Equityholders. For the three months ended September 30, 2015 , there were no such transactions and for the nine months ended September 30, 2015 , there were $16.8 million in real estate inventory acquisitions from such affiliates. For the three and nine months ended September 30, 2014 , there were $9.5 million and $40.5 million in real estate inventory acquisitions from such affiliates, respectively. Such real estate transactions with related parties are in the normal course of operations and are executed at arm's length, as they are entered into at terms comparable to those with unrelated third parties.


15. ACCUMULATED OTHER COMPREHENSIVE INCOME

The table below provides the components of accumulated other comprehensive income (loss) for the nine months ended September 30, 2015 (in thousands):

Total Post-

Retirement

Benefits

Adjustments

Foreign

Currency

Translation

Adjustments

Non-controlling

Interest - Principal

Equityholders

Reclassification

Total

Balance, beginning of period

$

692


$

(52,148

)

$

40,546


$

(10,910

)

Other comprehensive income/(loss) before reclassifications

269


(27,779

)

-


(27,510

)

Gross amounts reclassified from accumulated other comprehensive income

1,488


-


-


1,488


Foreign currency translation

518


-


(518

)

-


Other comprehensive income/(loss), net of tax

$

2,275


$

(27,779

)

$

(518

)

$

(26,022

)

Gross amounts reclassified within accumulated other comprehensive (loss)/income

(2,289

)

-


21,262


18,973


Balance, end of period

$

678


$

(79,927

)

$

61,290


$

(17,959

)


Reclassifications for the amortization of the employee retirement plans are included in selling, general and administrative expense in the accompanying Condensed Consolidated Statements of Operations.

16. OPERATING AND REPORTING SEGMENTS

We have fifteen homebuilding operating divisions which are aggregated into two reportable homebuilding segments. These segments are engaged in the business of acquiring and developing land, constructing homes, marketing and selling those homes, and providing warranty and customer service. We aggregate our homebuilding operating segments into reporting segments based on similar long-term economic characteristics. We also have a mortgage and financial services segment. We have no inter-segment sales as all sales are to external customers. Our reporting segments are as follows:

East

North Florida, West Florida, Houston, which includes a Taylor Morrison division and a Darling Homes division, Dallas, Austin, Raleigh, Charlotte and Atlanta

West

Denver, Chicago, Phoenix, Bay Area, Sacramento, and Southern California

Mortgage Operations

Mortgage and Financial Services (TMHF)


Management primarily evaluates segment performance based on GAAP gross margin, defined as homebuilding and land revenue less cost of home construction, commissions and other sales costs, land development and other land sales costs and other costs incurred by, or allocated to, each segment, including impairments. Operating results for each segment may not be indicative of the results for such segment had it been an independent, stand-alone entity.


Segment information, excluding discontinued operations, is as follows (in thousands):



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Table of Contents


Three Months Ended September 30, 2015

East

West

Mortgage

Operations

Corporate

and

Unallocated

Total

Total revenues

$

479,025


$

305,947


$

11,316


$

-


$

796,288


Gross margin

96,991


48,127


4,354


-


149,472


Selling, general and administrative expenses

(42,462

)

(19,822

)

(2

)

(16,460

)

(78,746

)

Equity in (loss)/income of unconsolidated entities

(427

)

(197

)

504


-


(120

)

Interest and other (expense)/income

(3,938

)

(108

)

-


1,686


(2,360

)

Income from continuing operations before income taxes

$

50,164


$

28,000


$

4,856


$

(14,774

)

$

68,246



Three Months Ended September 30, 2014

East

West

Mortgage

Operations

Corporate

and

Unallocated

Total

Total revenues

$

346,065


$

274,698


$

8,433


$

-


$

629,196


Gross margin

76,975


51,600


3,376


-


131,951


Selling, general and administrative expenses

(31,375

)

(17,410

)

-


(11,761

)

(60,546

)

Equity in income/(loss) of unconsolidated entities

971


(9

)

269


-


1,231


Interest and other (expense)/income

(4,102

)

361


-


155


(3,586

)

Income from continuing operations before income taxes

$

42,469


$

34,542


$

3,645


$

(11,606

)

$

69,050


Nine Months Ended September 30, 2015

East

West

Mortgage

Operations

Corporate

and

Unallocated

Total

Total revenues

$

1,229,910


$

747,972


$

28,794


$

-


$

2,006,676


Gross margin

249,532


120,507


10,674


-


380,713


Selling, general and administrative expenses

(111,295

)

(50,633

)

(2

)

(44,965

)

(206,895

)

Equity in income/(loss) of unconsolidated entities

429


(619

)

1,598


-


1,408


Interest and other (expense)/income

(11,986

)

421


-


105


(11,460

)

Loss on extinguishment of debt

-


-


-


(33,317

)

(33,317

)

Gain on foreign currency forward

-


-


-


29,983


29,983


Income from continuing operations before income taxes

$

126,680


$

69,676


$

12,270


$

(48,194

)

$

160,432



Nine Months Ended September 30, 2014

East

West

Mortgage

Operations

Corporate

and

Unallocated

Total

Total revenues

$

968,489


$

705,320


$

22,870


$

-


$

1,696,679


Gross margin

213,204


140,251


9,229


-


362,684


Selling, general and administrative expenses

(90,279

)

(47,273

)

-


(34,389

)

(171,941

)

Equity in income of unconsolidated entities

1,842


467


1,159


-


3,468


Interest and other (expense)/income

(12,266

)

321


-


248


(11,697

)

Income from continuing operations before income taxes

$

112,501


$

93,766


$

10,388


$

(34,141

)

$

182,514



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Table of Contents


As of
September 30, 2015

East

West

Mortgage

Operations

Corporate

and

Unallocated

Total

Real estate inventory and land deposits

$

1,660,653


$

1,503,896


$

-


$

-


$

3,164,549


Investments in unconsolidated entities

52,708


71,867


1,784


-


126,359


Other assets

240,367


58,441


119,537


412,415


830,760


Total assets

$

1,953,728


$

1,634,204


$

121,321


$

412,415


$

4,121,668


As of
December 31, 2014

East

West

Mortgage

Operations

Corporate

and

Unallocated

Assets of

Discontinued

Operations

Total

Real estate inventory and land deposits

$

1,275,192


$

1,277,673


$

-


$

-


$

-


$

2,552,865


Investments in unconsolidated entities

57,138


51,909


1,244


-


-


110,291


Other assets

166,854


37,989


204,685


483,984


576,445


1,469,957


Total assets

$

1,499,184


$

1,367,571


$

205,929


$

483,984


$

576,445


$

4,133,113


17. COMMITMENTS AND CONTINGENCIES

Letters of Credit and Surety Bonds  - We are committed, under various letters of credit and surety bonds, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit and surety bonds under these arrangements totaled $364.7 million and $315.6 million as of September 30, 2015 and December 31, 2014 , respectively. Although significant development and construction activities have been completed related to these site improvements, the bonds are generally not released until all development and construction activities are completed. We do not believe that it is probable that any outstanding bonds as of September 30, 2015 will be drawn upon.


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. At September 30, 2015 and December 31, 2014 , our legal accruals were $1.2 million and $0.9 million , respectively. 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.



22

Table of Contents


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For purposes of this "Management's Discussion and Analysis of Financial Condition and Results of Operations," the terms "the Company," "we," "us," or "our" refer to Taylor Morrison Home Corporation ("TMHC") and its subsidiaries.


Forward-Looking Statements

This quarterly report includes certain forward-looking statements within the meaning of the federal securities laws regarding, among other things, our or management's intentions, plans, beliefs, expectations or predictions of future events, which are considered forward-looking statements. You should not place undue reliance on those statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These statements often include words such as "may," "will," "should," "believe," "expect," "anticipate," "intend," "plan," "estimate," "can," "could," "might," "project" or similar expressions. These statements are based upon assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. As you read this quarterly report, 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 our Annual Report on Form 10-K for the year ended December 31, 2014 (the "Annual Report") filed with the Securities and Exchange Commission ("SEC"). 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 the 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.


Our forward-looking statements made herein are made only as of the date of this quarterly report. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements made herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based, except as required by applicable law. All subsequent written and verbal forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this quarterly report.

Business Overview

Our principal business is residential homebuilding and the development of lifestyle communities with operations geographically focused in Arizona, California, Colorado, Florida, Texas, and our newly acquired divisions in Georgia, Illinois, and North Carolina. 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 business operates under our Taylor Morrison and Darling Homes brand names. Our business is organized into 15 homebuilding operating divisions, and a mortgage division, which are managed as three reportable segments: East, West and Mortgage Operations, as follows:

East

North Florida, West Florida, Houston, which includes a Taylor Morrison division and a Darling Homes division, Dallas, Austin, Raleigh, Charlotte and Atlanta

West

Denver, Chicago, Phoenix, Bay Area, Sacramento and Southern California

Mortgage Operations

Mortgage and Financial Services (TMHF)


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


Our Mortgage Operations reportable segment provides financial services to customers 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 closed the sale of Monarch Corporation, our former Canadian operating segment ("Monarch"). As a result of the sale, we do not have significant continuing involvement with Monarch, and the operating results and financial condition are presented as discontinued operations.


Non-GAAP Measures


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Table of Contents


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


Adjusted home closings gross margin

We calculate adjusted home closings gross margin from 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. Management uses adjusted home closings gross margin to evaluate our operational and economic performance on a consolidated basis. 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 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.

Recent Developments

Orleans Homes

On July 21, 2015, we completed the acquisition of three divisions of Orleans Homes for a purchase price of approximately $ 167.3 million , consisting of cash and seller financing.


JEH Homes

On April 30, 2015, we acquired JEH Homes, an Atlanta based homebuilder, for a purchase price of approximately $ 63.2 million , excluding contingent consideration.


Third Quarter 2015 Highlights

Key financial results as of and for the three months ended September 30, 2015 , as compared to the same period in 2014 , are as follows:

Average community count increased 29% from the prior year quarter to 276 average communities

Net sales orders increased over 18% to 1,635

Home closings increased 28% to 1,700

Backlog of homes under contract at the end of the quarter was 3,560 units, with a sales value of $1.6 billion

Cancellations as a percentage of gross sales orders were 15% , compared to 14% in the prior year quarter

Average price of homes closed was $458,000

Average monthly absorption pace per community was 2.0 for the quarter

Mortgage operations reported gross profit of $4.4 million on revenue of $11.3 million


24

Table of Contents


Results of Operations

The following table sets forth our results of operations (unaudited):


(Dollars in thousands)

Three Months Ended
September 30, 2015

Nine Months Ended
September 30, 2015

2015

2014

2015

2014

Statements of Operations Data:

Home closings revenue, net

$

779,190


$

615,736



$

1,955,170



$

1,653,890


Land closings revenue

5,782


5,027



22,712



19,919


Mortgage operations revenue

11,316


8,433



28,794



22,870


Total revenues

796,288


629,196


2,006,676


1,696,679


Cost of home closings

635,935


488,250


1,594,691


1,304,595


Cost of land closings

3,919


3,938


13,152


15,759


Mortgage operations expenses

6,962


5,057


18,120


13,641


Gross margin

149,472


131,951


380,713


362,684


Sales, commissions and other marketing costs

53,482


41,432


136,724


114,362


General and administrative expenses

25,264


19,114


70,171


57,579


Equity in loss/(income) of unconsolidated entities

120


(1,231

)

(1,408

)

(3,468

)

Interest (income) expense, net

(33

)

345


(165

)

1,127


Other expense, net

2,393


3,241


11,625


10,570


Loss on extinguishment of debt

-


-


33,317


-


Gain on foreign currency forward

-


-


(29,983

)

-


Income from continuing operations before income taxes

68,246


69,050


160,432


182,514


Income tax provision

22,452


19,541


54,434


50,602


Net income from continuing operations

45,794


49,509


105,998


131,912


Discontinued operations:

Income from discontinued operations

-


23,970


-


44,543


Transaction expenses from discontinued operations

-


-


(9,043

)

-


Gain on sale of discontinued operations

-


-


80,205


-


Income tax provision from discontinued operations

-


(7,304

)

(14,500

)

(13,485

)

Net income from discontinued operations

-


16,666


56,662


31,058


Net income before allocation to non-controlling interests

45,794


66,175


162,660


162,970


Net income attributable to non-controlling interests – joint ventures

(138

)

(47

)

(1,427

)

(386

)

Net income before non-controlling interests – Principal Equityholders

45,656


66,128


161,233


162,584


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

(33,312

)

(36,122

)

(76,470

)

(96,308

)

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

-


(12,160

)

(41,381

)

(22,682

)

Net income available to Taylor Morrison Home Corporation

$

12,344


$

17,846


$

43,382


$

43,594


Home closings gross margin

18.4

%

20.7

%

18.4

%

21.1

%

Adjusted home closings gross margin

21.2

%

23.2

%

21.4

%

23.5

%

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

6.9

%

6.7

%

7.0

%

6.9

%

General and administrative expenses as a percentage of home closings revenue

3.2

%

3.1

%

3.6

%

3.5

%

Average sales price per home closed

$

458


$

463


$

461


$

450








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Table of Contents


Three and Nine Months Ended September 30, 2015 Compared to Three and Nine Months Ended September 30, 2014

Average Active Selling Communities

Three Months Ended
September 30,

2015

2014

Change

East

202


159


27.0

%

West

74


55


34.5

%

Total

276


214


29.0

%

Nine Months Ended
September 30,

2015

2014

Change

East

196


148


32.4

%

West

72


53


35.8

%

Total

268


201


33.3

%


Consolidated:

Average active selling communities for three and nine months ended September 30, 2015 increased by 29.0% and 33.3% , respectively, when compared to the prior year. The increase was primarily due to the acquisitions of JEH in April 2015 and three divisions of Orleans in July 2015 as well as community growth in existing divisions. We opened new communities and closed out existing communities throughout all of our legacy markets. 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

(Dollars in thousands)

Three Months Ended September 30,

(1)

Net Sales Orders

Sales Value

Average Selling Price

2015

2014

Change

2015

2014

Change

2015

2014

Change

East

1,016


938


8.3

%

$

402,606


$

385,937


4.3

%

$

396


$

411


(3.6

)%

West

619


446


38.8

%

306,149


247,642


23.6

%

495


555


(10.8

)%

Total

1,635


1,384


18.1

%

$

708,755


$

633,579


11.9

%

$

433


$

458


(5.5

)%

(Dollars in thousands)

Nine Months Ended September 30,

(1)

Net Sales Orders

Sales Value

Average Selling Price

2015

2014

Change

2015

2014

Change

2015

2014

Change

East

3,224


2,868


12.4

%

$

1,315,176


$

1,182,247


11.2

%

$

408


$

412


(1.0

)%

West

2,017


1,565


28.9

%

982,968


859,467


14.4

%

487


549


(11.3

)%

Total

5,241


4,433


18.2

%

$

2,298,144


$

2,041,714


12.6

%

$

438


$

461


(5.0

)%

(1)

Net sales orders represent the number and dollar value of new sales contracts executed with customers, net of cancellations.


Consolidated:

The increase in the total value and units of net sales orders in 2015 compared to 2014 for the three and nine months ended September 30, 2015 , was due to an increase in our average active selling communities, and the acquisition of JEH in Atlanta and Orleans in Charlotte, Raleigh, and Chicago. The increases were also driven by consumer demand for our well-located and desirable product offerings in our legacy markets. Consumer demand increased as a result of relatively steady low interest rates and stabilizing macroeconomic conditions relative to the prior comparable period. Average selling price decreased due to a larger percentage increase in sales orders in the West, which also had a larger decrease in the average selling price due to a shift in product mix to divisions with lower sales value.


East:

Net sales orders increased in both units and in sales value in 2015 compared to 2014 for the three and nine months ended September 30, 2015 due to an increase in average active selling communities and as a result of the acquisition of JEH and Orleans. Net homes sold and total sales value increased by 8.3% and 4.3% for the three months ended September 30, 2015 ,


26

Table of Contents


respectively. Similarly, for the nine months ended September 30, 2015 , there was an increase of net homes sold of 12.4% and total sales value of 11.2% . The average selling price of net homes sold in the East segment decreased by 3.6% and 1.0% for the three and nine months ended September 30, 2015 , respectively. The decrease in average selling price for both periods was primarily driven by the Atlanta, Charlotte, and Raleigh divisions which have a lower average selling price compared to the other divisions in the segment.


West:

Net sales orders increased in both units and in sales value in 2015 compared to 2014 for the three and nine months ended September 30, 2015 , due to an increase in average active selling communities. Net homes sold and total sales value increased by 38.8% and 23.6% for the three months ended September 30, 2015 , respectively. For the nine months ended September 30, 2015 , net sales orders and sales value increased by 28.9% and 14.4% , respectively. Our Phoenix division was a significant contributor to these increases. A shift in product mix from homes in the California divisions to the Phoenix division, where homes are more moderately priced, resulted in a decrease in average selling price for the three and nine months ended September 30, 2015 .



Sales Order Cancellations

Three Months Ended September 30,

Canceled Sales Orders

Cancellation Rate (1)

2015

2014

2015

2014

East

188


115


15.6

%

10.9

%

West

107


102


14.7

%

18.6

%

Total/weighted average

295


217


15.3

%

13.6

%

Nine Months Ended September 30,

Canceled Sales Orders

Cancellation Rate (1)

2015

2014

2015

2014

East

483


371


13.0

%

11.4

%

West

279


267


12.2

%

14.6

%

Total/weighted average

762


638


12.7

%

12.6

%

(1)

Cancellation rate represents the number of canceled 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 helped us maintain a consistent cancellation rate for the nine months ended September 30, 2015 , as compared to the prior year period.


Sales Order Backlog

As of September 30,

(Dollars in thousands)

Sold Homes in Backlog (1)

Sales Value

Average Selling Price

2015

2014

Change

2015

2014

Change

2015

2014

Change

East

2,390


2,111


13.2

%

$

1,058,329


$

978,999


8.1

%

$

443


$

464


(4.5

)%

West

1,170


813


43.9

%

581,268


494,671


17.5

%

497


608


(18.3

)%

Total

3,560


2,924


21.8

%

$

1,639,597


$

1,473,670


11.3

%

$

461


$

504


(8.5

)%

(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:

The increase in backlog units for both the East and the West is consistent with our increases in net homes sold and new community openings year over year. Backlog value increased in total by 11.3% as a result of backlog units increasing by 21.8% . Average selling price in the East decreased as a result of a shift in product mix to our newly acquired JEH and Orleans


27

Table of Contents


divisions which have a lower average selling price. The West experienced a decrease in average selling price due to a shift in product mix as well from the California divisions to the Denver and Phoenix divisions.



Home Closings Revenue

Three Months Ended September 30,

(Dollars in thousands)

Homes Closed

Home Closings Revenue, Net

Average Selling Price

2015

2014

Change

2015

2014

Change

2015

2014

Change

East

1,100


800


37.5

%

$

473,243


$

341,038


38.8

%

$

430


$

426


0.9

 %

West

600


531


13.0

%

305,947


274,698


11.4

%

510


517


(1.4

)%

Total

1,700


1,331


27.7

%

$

779,190


$

615,736


26.5

%

$

458


$

463


(1.1

)%

Nine Months Ended September 30,

(Dollars in thousands)

Homes Closed

Home Closings Revenue, Net

Average Selling Price

2015

2014

Change

2015

2014

Change

2015

2014

Change

East

2,802


2,301


21.8

%

$

1,212,239


$

949,494


27.7

%

$

433


$

413


4.8

%

West

1,441


1,374


4.9

%

742,931


704,396


5.5

%

516


513


0.6

%

Total

4,243


3,675


15.5

%

$

1,955,170


$

1,653,890


18.2

%

$

461


$

450


2.4

%


East:

Home closings revenue improved as a result of the combination of increased average selling price and the acquisitions of JEH and the Orleans divisions, which contributed to an increase in homes closed. The aggregate net revenue of homes closed increased by 38.8% and 27.7% for the three and nine months ended September 30, 2015 , respectively. We believe economic market improvements, as well as favorable homebuyer reception of new communities, contributed to net home closings revenue increases. In addition, average selling price increased 0.9% and 4.8% for the three and nine months ended September 30, 2015 . Homes closed in our West Florida division for the three months ended September 30, 2015 increased compared to the same period in the prior year. Significant contributors of homes closed for the nine months ended September 30, 2015 included Darling Dallas, North Florida, and West Florida, driving both units and dollars higher as consumer demand for move-up and luxury products benefited our communities in these markets.


West:

During the third quarter of 2015 , total homes closed units and home closings revenue increased by 13.0% and 11.4% , respectively, compared to the prior year period, which was primarily driven by increased closings in the Bay Area, Sacramento, and Denver divisions, in addition to the acquisition of our Chicago division. Average selling price of homes closed during the quarter decreased by 1.4%, driven primarily by a shift of closings from the Bay Area to more moderately priced products in the Denver and Phoenix markets.


For the nine months ended September 30, 2015 , total homes closed units and home closings revenue increased by 4.9% and 5.5% , respectively, compared to the prior year period. This increase was primarily driven by increased closings in the Bay Area, Sacramento, and Denver divisions. Average sales price remained relatively flat as the product mix slowly shifts from higher priced homes in the Bay Area and Southern California to more moderately priced divisions such as Phoenix and Denver.



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Table of Contents


Land Closings Revenue

Three Months Ended September 30,

(In thousands)

2015

2014

Change

East

$

5,782


$

5,027


15.0

%

West

-


-


-

%

Total

$

5,782


$

5,027


15.0

%

Nine Months Ended September 30,

(In thousands)

2015

2014

Change

East

$

17,671


$

18,994


(7.0

)%

West

5,041


925


445.0

 %

Total

$

22,712


$

19,919


14.0

 %


Consolidated:

We generally purchase land and lots with the intent to build and sell homes. However, in some locations where we act as a developer, we occasionally purchase land that includes commercially zoned parcels or areas designated for school or government use, which we typically sell to commercial developers or municipalities. We also sell residential lots or land parcels to manage our land and lot supply on larger tracts of land on which we would otherwise not achieve financial returns that are in line with our internal expectations as well as to enhance our returns and offset our risk. Land and lot sales occur at various intervals and varying degrees of profitability. Therefore, the revenue and gross margin from land closings will fluctuate from period to period, depending on market opportunities.



29

Table of Contents


Segment Home Closings Gross Margin

The following tables set forth a reconciliation between our GAAP home closings gross margin and adjusted home closings gross margin. See "-Non-GAAP Measures-Adjusted home closings gross margin."


East

West

Consolidated

Three Months Ended September 30,

(Dollars in thousands)

2015

2014

2015

2014

2015

2014

Home Closings

Home closings revenue, net

$

473,243


$

341,039


$

305,947


$

274,697


$

779,190


$

615,736


Cost of home closings

378,110


265,154


257,825


223,096


635,935


488,250


Home closings gross margin

95,133


75,885


48,122


51,601


143,255


127,486


Capitalized interest amortization

12,794


6,149


9,092


9,078


21,886


15,227


Adjusted home closings gross margin

$

107,927


$

82,034


$

57,214


$

60,679


$

165,141


$

142,713


Home closings gross margin %

20.1

%

22.3

%

15.7

%

18.8

%

18.4

%

20.7

%

Adjusted home closings gross margin %

22.8

%

24.1

%

18.7

%

22.1

%

21.2

%

23.2

%

East

West

Consolidated

Nine Months Ended September 30,

(Dollars in thousands)

2015

2014

2015

2014

2015

2014

Home Closings

Home closings revenue, net

$

1,212,239


$

949,494


$

742,931


$

704,396


$

1,955,170


$

1,653,890


Cost of home closings

969,946


740,392


624,745


564,203


1,594,691


1,304,595


Home closings gross margin

242,293


209,102


118,186


140,193


360,479


349,295


Capitalized interest amortization

35,151


15,824


23,452


23,891


58,603


39,715


Adjusted home closings gross margin

$

277,444


$

224,926


$

141,638


$

164,084


$

419,082


$

389,010


Home closings gross margin %

20.0

%

22.0

%

15.9

%

19.9

%

18.4

%

21.1

%

Adjusted home closings gross margin %

22.9

%

23.7

%

19.1

%

23.3

%

21.4

%

23.5

%


Consolidated:

Our consolidated adjusted home closings gross margin percentage for the three and nine months ended September 30, 2015 , decreased compared to the same period in 2014 . Geographic and product mix had an impact on margin rate as well as the relatively lower margin communities in certain of our recently acquired divisions. Relatively lower margins in our recently acquired divisions are influenced by the effects of purchase accounting and the local geographic markets being more moderately priced. In addition, our legacy divisions are experiencing higher land and development and construction costs as we naturally deplete our legacy land supply. Our legacy land holdings have lower carrying costs, and as a result home closings gross margin percentage is decreasing as those legacy holdings reflect a reduced portion of our overall product mix.


East:

Home closings gross margin and adjusted home closings gross margin percentage decreased for the three and nine months ended September 30, 2015 compared to the same periods in 2014, primarily as a result of the addition of lower margin communities, product mix, and the effects of purchase accounting. Additionally, margin was negatively impacted due to labor supply constraints in most of our markets and poor weather in some of our markets during the third quarter of 2015 .


West:

Home closings gross margin percentage and adjusted home closings gross margin percentage decreased for the three and nine months ended September 30, 2015 primarily due to a geographic shift in the percentage of homes closed in our Southern California division where the margin rate is lower although margin dollars are higher. In addition, a shift in product penetration


30

Table of Contents


within the West divisions, as well as commodity and labor pricing in construction costs continued to negatively affect margin rates.


Mortgage Operations

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


Three Months Ended
September 30,

Nine Months Ended
September 30,

(Dollars in thousands)

2015

2014

2015

2014

Mortgage operations revenue

$

11,316


$

8,433


$

28,794


$

22,870


Mortgage operations expenses

6,962


5,057


18,120


13,641


Mortgage operations gross margin

$

4,354


$

3,376


$

10,674


$

9,229


Mortgage operations margin %

38.5

%

40.0

%

37.1

%

40.4

%


Our Mortgage Operations segment's revenue increased due primarily to increased closings volume and average loan amounts, while operating 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 following periods:


Closed

Loans

Aggregate

Loan Volume

(in millions)

Capture Rate

Three Months Ended September 30, 2015

964


$

319.8


80

%

Three Months Ended September 30, 2014

788


258.6


75

%


Closed

Loans

Aggregate

Loan Volume

(in millions)

Capture Rate

Nine Months Ended September 30, 2015

2,471


$

826.8


78

%

Nine Months Ended September 30, 2014

2,141


691.2


73

%


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 improved during the three and nine months ended September 30, 2015 as compared to the same periods in 2014 . In the third quarter of 2015 and 2014 , the average FICO score of customers who obtained mortgages through TMHF was 743 and 741 , respectively. In the first nine months of 2015 and 2014 , the average FICO score of customers who obtained mortgages through TMHF was 743 and 741 , respectively.


Sales, Commissions and Other Marketing Costs

Sales, commissions and other marketing costs, as a percentage of home closings revenue, were relatively consistent period of over period at 6.9% and 6.7% for three months ended September 30, 2015 and 2014 , respectively. For the nine months ended September 30, 2015 and 2014 , sales, commissions and other marketing costs, as a percentage of home closings revenue, were also consistent at 7.0% and 6.9% .



General and Administrative Expenses

General and administrative expenses were 3.2% and 3.1% of home closings revenue for three months ended September 30, 2015 and 2014 , respectively. For the nine months ended September 30, 2015 and 2014 , general and administrative expenses were 3.6% and 3.5% of home closings revenue, respectively. The slight increase is primarily related to acquisition costs and costs associated with integrating our newly acquired divisions. We continue to utilize our scalable platform, providing leverage with existing infrastructure in an effort to maintain stable operating costs.


Equity in Income of Unconsolidated Entities


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Table of Contents


Equity in income of unconsolidated entities was a loss of $0.1 million and income of $1.4 million for the three and nine months ended September 30, 2015 , respectively, compared to income of $1.2 million and $3.5 million for the three and nine months ended September 30, 2014 , respectively. The decrease was due to a combination of the closeout of two joint ventures in June 2014, the start-up of three new joint ventures which began during the second half 2014, as well as the incurrence of start-up costs from two new joint ventures in the second quarter of 2015.


Interest (Income)/Expense, Net

Interest expense, net represents interest incurred but not capitalized on our long-term debt and other borrowings. In the three and nine months ended September 30, 2015 , compared to September 30, 2014 , the change from net interest expense to net interest income was due to increased capitalization of interest as a result of higher levels of qualified assets as well as cash on deposit generating interest income.


Other Expense, Net

Other expense, net for three months ended September 30, 2015 and 2014 was $2.4 million and $3.2 million , respectively. For the nine months ended September 30, 2015 and 2014 , other expense was $11.6 million and $10.6 million , respectively. The majority of the expense for both periods relate to accruals for contingent consideration. Other expense also generally consists of mothball community expense, pre-acquisition costs on unpursued land projects, captive insurance claims costs and financing fees on our Revolving Credit Facility.


Loss on Extinguishment of Debt

On May 1, 2015 we redeemed the entire outstanding aggregate principal amount of our 2020 Senior Notes at a redemption price of 105.813% of their aggregate principal amount, plus accrued and unpaid interest thereon to, but not including, the date of redemption. The redemption was made using cash on hand together with the proceeds from the issuance of our $350 million 2023 Senior Notes, which was completed on April 16, 2015. As a result of the redemption of the 2020 Senior Notes, we recorded a loss on extinguishment of debt of $33.3 million for the nine months ended September 30, 2015 which included the redemption premium and the write off of net unamortized deferred financing fees. We did not incur any losses on extinguishment of debt for the three and nine months ended September 30, 2014 .


Gain on Foreign Currency Forward

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 final settlement of the derivative financial instrument occurred on January 30, 2015 and a gain in the amount of $30.0 million was recorded in foreign currency forward in the accompanying Condensed Consolidated Statements of Operations for the nine months ended September 30, 2015 .


Income Tax Provision

The effective income tax rate from continuing operations for both the three and nine months ended September 30, 2015 reflect certain benefits for domestic production activities.  The nine months ended September 30, 2014 benefited from certain items related to a release of a portion of the valuation allowance on deferred tax assets and the U.S. repatriation of foreign funds.


Liquidity and Capital Resources

We finance our operations through the following:

Borrowings under our Revolving Credit Facility;

Our various series of Senior Notes;

Project-level financing (including non-recourse loans);

Mortgage warehouse facilities; and

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 Revolving Credit Facility; and


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Table of Contents


Additional offerings of senior notes, if needed.


Our principal uses of capital in the three and nine months ended September 30, 2015 and 2014 were land purchases, lot development, home construction, operating expenses, debt service payments, income taxes, investments in joint ventures, the payment of various liabilities and the acquisition of JEH Homes and three divisions of Orleans Homes. 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 capital expenditures for land acquisitions, plats, vertical and horizontal 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 operating cash outflows prior to recognition of earnings.


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 market on an opportunistic basis.


Cash and Cash Equivalents

As of September 30, 2015 , cash and cash equivalents consist of cash on hand, demand deposits with financial institutions and short-term, highly liquid investments. In addition, at September 30, 2015 , our aggregate total cash on hand and availability under credit facilities was approximately $395.3 million . 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 United States by the Federal Deposit Insurance Corporation.


The following table summarizes our outstanding senior unsecured notes (collectively, the "Senior Notes"), as of September 30, 2015 .

(Dollars in thousands)

Date Issued

Principal

Amount

Initial Offering

Price

Interest Rate

Original Net

Proceeds

Original Debt

Issuance

Cost

Senior Notes due 2021

April 16, 2013

550,000


100.0

%

5.250

%

541,700


8,300


Senior Notes due 2023

April 16, 2015

350,000


100.0

%

5.875

%

345,500


4,500


Senior Notes due 2024

March 5, 2014

350,000


100.0

%

5.625

%

345,300


4,700


Total

$

1,250,000


$

1,232,500


$

17,500



2020 Senior Notes

The 2020 Senior Notes were redeemed in full on May 1, 2015 using the net proceeds from an issuance of new 2023 senior unsecured notes, together with cash on hand. See 2023 Senior Notes and Redemption of 2020 Senior Notes below for additional information regarding the redemption of the 2020 Senior Notes.


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 mature on April 15, 2021. The 2021 Senior Notes are guaranteed by TMM Holdings, Taylor Morrison Holdings, Inc., Taylor Morrison Communities II, Inc. and the U.S. homebuilding subsidiaries of TMC (collectively, the "Guarantors"). The 2021 Senior Notes and the guarantees are senior unsecured obligations and are not subject to registration rights. The indenture for the 2021 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 2021 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 2021 Senior Notes at par (plus accrued and unpaid interest) with such proceeds. We are also required to offer to repurchase the 2021 Senior Notes at a price equal to 101% of their aggregate principal amount (plus accrued and unpaid interest) upon certain change of control events.


There are no financial maintenance covenants for the 2021 Senior Notes.


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Table of Contents



2023 Senior Notes and Redemption of 2020 Senior Notes

On April 16, 2015 , we issued $350.0 million aggregate principal amount of 5.875% Senior Notes due 2023 (the "2023 Senior Notes"). The 2023 Senior Notes are unsecured and are not subject to registration rights. The net proceeds of the offering, together with cash on hand, were used to redeem the entire remaining $485.4 million aggregate principal amount of 7.75% 2020 Senior Notes on May 1, 2015, at a redemption price of 105.813% of their aggregate principal amount, plus accrued and unpaid interest thereon to, but not including, the date of redemption. As a result of the redemption of the 2020 Senior Notes, we recorded a loss on extinguishment of debt of $33.3 million , which included the payment of the redemption premium and write off of net unamortized deferred financing fees.


The 2023 Senior Notes mature on April 15, 2023. The 2023 Senior Notes are guaranteed by the same Guarantors that guarantee the 2021 Senior Notes. The 2023 Senior Notes and the guarantees are senior unsecured obligations. The indenture governing the 2023 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 2023 Senior Notes contains events of default that are similar to those contained in the indenture governing the 2021 Senior Notes. The change of control provisions in the indenture governing the 2023 Senior Notes are similar to those contained in the indenture governing 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 2023 Senior Notes.


Prior to January 15, 2023, the 2023 Senior Notes are redeemable at a price equal to 100% plus a "make-whole" premium for payments through January 15, 2023 (plus accrued and unpaid interest). Beginning January 15, 2023, the 2023 Senior Notes are redeemable at par (plus accrued and unpaid interest).


There are no financial maintenance covenants for the 2023 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 net proceeds from the issuance of the 2024 Senior Notes were used to repay the outstanding balance under the 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 2021 Senior Notes. The 2024 Senior Notes and the guarantees are senior unsecured obligations and are not subject to registration rights. 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 indenture governing the 2021 Senior Notes. The change of control provisions in the indenture governing the 2024 Senior Notes are similar to those contained in the indenture governing 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).


There are no financial maintenance covenants for the 2024 Senior Notes.


TMHC Compared to TMM Holdings

The financial information of TMHC is substantially identical to the financial performance and operations of TMM Holdings except for certain SEC and regulatory fees which are attributable to TMHC.


Revolving Credit Facility

On April 24, 2015, we entered into Amendment No. 3 to the Revolving Credit Facility. Among other things, this amendment increased the amount available under the Revolving Credit Facility to $500.0 million , extended the maturity of the Revolving Credit Facility to April 12, 2019 and reduced certain margins payable thereunder. The Revolving Credit Facility is guaranteed by the same Guarantors that guarantee the 2021 Senior Notes.


The Revolving Credit Facility contains certain "springing" financial covenants, requiring us and our subsidiaries to comply with a maximum debt to capitalization ratio of not more than 0.60 to 1.00 and a minimum consolidated tangible net worth level


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of at least $1.4 billion . The financial covenants would be in effect for any fiscal quarter during which any (a) loans under the 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 Revolving Credit Facility in an aggregate amount greater than $40.0 million or unreimbursed letters of credit issued under the 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 Revolving Credit Facility provides that we may exercise an equity cure by issuing certain permitted securities for cash or otherwise recording cash contributions to our 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. Our debt to total capitalization ratio at September 30, 2015 was 0.44 to 1.00. At September 30, 2015 , the Borrower's tangible net worth, as defined in the Revolving Credit Facility, was $1.9 billion .


The 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 on prepayment of subordinated indebtedness and limitations on fundamental changes. The 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 September 30, 2015 , we were in compliance with all of the covenants under the Revolving Credit Facility.



Mortgage Company Loan Facilities

The following table summarizes the terms of our TMHF warehouse facilities:

As of
September 30, 2015

Facility

Amount Drawn

Facility Amount

Interest Rate

Expiration Date

Collateral  (1)

Flagstar

$

25,451


$

55,000


LIBOR + 2.5%

30 days written notice

Mortgage Loans

Comerica

-


50,000


LIBOR + 2.75%

November 17, 2015 (3)

Mortgage Loans

J.P. Morgan

48,677


100,000


(2)

September 26, 2016

Pledged Cash

Total

$

74,128



$

205,000


(1)

The mortgage borrowings outstanding as of September 30, 2015 and December 31, 2014 , are collateralized by $104.1 million and $191.1 million , respectively, of mortgage loans held for sale, which comprise the balance of mortgage loans held for sale and $1.3 million and $1.3 million , respectively, of restricted short-term investments which are included in restricted cash in the accompanying Condensed Consolidated Balance Sheets.

(2)

As of December 31, 2014 and through the date of expiration of September 28, 2015, interest under the J.P. Morgan agreement ranged from 2.375% plus 30-day LIBOR to 2.875% plus 30-day LIBOR or 0.25% (whichever was greater). The agreement was renewed in September 2015 setting the interest rate at 2.375% plus 30-day LIBOR.

(3)

We are currently working to renew the Comerica facility. This facility has been in place for a number of years and the renewal process has been proceeding in a manner similar to that in previous years.


Loans Payable and Other Borrowings

Loans payable and other borrowings as of September 30, 2015 consist of project-level debt due to various land sellers and seller financing notes from current and prior year acquisitions. Project-level debt is generally secured by the land that was acquired and the principal payments generally coincide with corresponding project lot sales or a principal reduction schedule. Loans payable bear interest at rates that ranged from 0% to 8% at September 30, 2015 and December 31, 2014 . We impute interest for loans with no stated interest rates. The weighted average interest rate on $110.9 million of the loans as of September 30, 2015 was 5.4%  per annum, and $34.7 million of the loans were non-interest bearing.


Letters of Credit, Surety Bonds and Financial Guarantees


In the course of land development and acquisition, we have issued letters of credit under our Revolving Credit Facility to various land sellers and municipalities in the amounts below as of the dates indicated:


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As of

September 30, 2015

December 31, 2014

(In thousands)

Available

Issued

Available

Issued

Revolving Credit Facility–Letters of Credit

$

200,000


$

32,960


$

200,000


$

35,071



Operating Cash Flow Activities

Our net cash used in operating activities was $271.7 million for the nine months ended September 30, 2015 compared to $371.0 million for the nine months ended September 30, 2014 . The primary drivers of the change year over year include a smaller decrease in real estate inventory and land deposits, and a decrease in mortgage loans held for sale. Also, contributing to the change was the $33.3 million loss on extinguishment of debt which was offset by an approximately $30.0 million gain on a foreign currency forward and a decrease in investments of capital into unconsolidated entities year over year.


Investing Cash Flow Activities

Net cash provided by investing activities was $59.7 million for the nine months ended September 30, 2015 , as compared to cash used in investing activities of $71.2 million for the nine months ended September 30, 2014 . The increase in cash provided by investing activities was primarily the result of our Monarch disposition in the first quarter of 2015 , and cash received from a foreign currency forward. This increase was partially offset by the acquisitions of JEH and three divisions of Orleans Homes.


Financing Cash Flow Activities

Net cash used in financing activities was $71.4 million for the nine months ended September 30, 2015 , compared to $341.8 million of net cash provided by financing activities for the nine months ended September 30, 2014 . The change in net cash from financing activities year over year was primarily attributable to an increase in net repayments on our lines of credit related to mortgage borrowings and the redemption of the 2020 Senior Notes, partially offset by increased net borrowings on our Revolving Credit Facility.


Commercial Commitments and Off-Balance Sheet Arrangements

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


As of

(In thousands)

September 30, 2015

December 31, 2014

Letters of credit

$

32,960


$

35,071


Surety bonds

$

331,692


$

280,559


Total outstanding letters of credit and surety bonds

$

364,652


$

315,630



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 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.


For the nine months ended September 30, 2015 , total net capital contributed to unconsolidated joint ventures was $23.4 million .


Land Purchase and Land Option Contracts


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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 September 30, 2015 , we had outstanding land purchase and lot option contracts of $798.1 million . 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.


Seasonality

Our business is seasonal. We have historically experienced, and in the future 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 higher 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 that land 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 the results we expect at year end.


Inflation

We and the homebuilding industry in general may be adversely affected during periods of high inflation, primarily because of higher land, financing, labor and construction material costs. In addition, higher mortgage interest rates can significantly affect the affordability of permanent mortgage financing to prospective homebuyers. We attempt to pass through to our customers any increases in our costs through increased sales prices. However, during periods of soft housing market conditions, we may not be able to offset our cost increases with higher selling prices.

Critical Accounting Policies

There have been no significant changes to our critical accounting policies during the three or nine months ended September 30, 2015 as compared to those we disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2014 .



ITEM 3. 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 September 30, 2015 , approximately 82.1% of our debt was fixed rate and 17.9% 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 Revolving Credit Facility and to any borrowings by TMHF under its various warehouse facilities. As of September 30, 2015 ,


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we had $230.0 million outstanding borrowings under our Revolving Credit Facility. We had $237.0 million of additional availability for borrowings and $167.0 million of additional availability for letters of credit (giving effect to $33.0 million of letters of credit outstanding as of such date). Our fixed rate debt is subject to a requirement that we offer to purchase the 2021 Senior Notes at par with certain proceeds of asset sales (to the extent not applied in accordance with the indenture 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 be expected 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 September 30, 2015 . The interest rate for our variable rate debt represents the interest rate on our borrowings under our 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

$

31.4


$

55.7


$

25.9


$

14.4


$

11.5


$

1,256.7


$

1,395.6


$

1,377.5


Average interest rate (1)

4.1

%

4.1

%

4.1

%

4.1

%

4.1

%

5.5

%

5.4

%

Variable Rate Debt (2)

$

304.1


$

-


$

-


$

-


$

-


$

-


$

304.1


$

304.1


Average interest rate

2.3

%

-


-


-


-


-


2.3

%

(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 September 30, 2015 , and holding the variable rate debt balance constant, each 1% increase in interest rates would increase the interest incurred by us by approximately $3.0 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 in the amount of $30.0 million was recorded in foreign currency forward in the accompanying Condensed Consolidated Statements of Operations for the nine months ended September 30, 2015 .


ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) as of September 30, 2015 . Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the periods specified in the Securities and Exchange Commission's rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.


Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative


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Table of Contents


to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake.

Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of controls.


The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.


Changes in Internal Controls

No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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Table of Contents



PART II - OTHER INFORMATION


ITEM 1. 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 1A. RISK FACTORS

There have been no material changes to the Risk Factors set forth in Part 1, Item 1A. of our 2014 Annual Report on Form 10-K. These Risk Factors may materially affect our business, financial condition or results of operations. You should carefully consider the Risk Factors set forth in our 2014 Annual Report on Form 10-K and the other information set forth elsewhere in this quarterly report. You should be aware that these Risk Factors and other information may not describe every risk facing our Company.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4. MINE SAFETY DISCLOSURES

None.


ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit

No.

Description

3.1

Amended and Restated Certificate of Incorporation (included as Exhibit 3.1 to the Company's Current Report on Form 8-K, filed on April 15, 2013, and incorporated herein by reference).

3.2

Amended and Restated By-laws (included as Exhibit 3.2 to the Company's Current Report on Form 8-K, filed on April 15, 2013, and incorporated herein by reference).


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Exhibit

No.

Description

31.1*

Certification of Sheryl D. Palmer, Chief Executive Officer, pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.

31.2*

Certification of C. David Cone, Chief Financial Officer, pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.

32.1*

Certification of Sheryl D. Palmer, Chief Executive Officer, pursuant to Section 906 of the Sarbanes–Oxley Act of 2002.

32.2*

Certification of C. David Cone, Chief Financial Officer, pursuant to Section 906 of the Sarbanes–Oxley Act of 2002.

101.INS

XBRL Instance Document.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

*    Filed herewith


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

TAYLOR MORRISON HOME CORPORATION

Registrant

DATE:

November 4, 2015

/s/ Sheryl D. Palmer

Sheryl D. Palmer

President and Chief Executive Officer

(Principal Executive Officer)

/s/ C. David Cone

C. David Cone

Vice President and Chief Financial Officer

(Principal Financial Officer)

/s/ Joseph Terracciano

Joseph Terracciano

Chief Accounting Officer

(Principal Accounting Officer)



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EXHIBIT INDEX

Exhibit

No.

Description

3.1

Amended and Restated Certificate of Incorporation (included as Exhibit 3.1 to the Company's Current Report on Form 8-K, filed on April 15, 2013, and incorporated herein by reference).

3.2

Amended and Restated By-laws (included as Exhibit 3.2 to the Company's Current Report on Form 8-K, filed on April 15, 2013, and incorporated herein by reference).

31.1*

Certification of Sheryl D. Palmer, Chief Executive Officer, pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.

31.2*

Certification of C. David Cone, Chief Financial Officer, pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.

32.1*

Certification of Sheryl D. Palmer, Chief Executive Officer, pursuant to Section 906 of the Sarbanes–Oxley Act of 2002.

32.2*

Certification of C. David Cone, Chief Financial Officer, pursuant to Section 906 of the Sarbanes–Oxley Act of 2002.

101.INS

XBRL Instance Document.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

 *    Filed herewith




43