10-Q
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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 not 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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Table of Contents


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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Table of Contents

 
 
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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Table of Contents

 
 
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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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.

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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Table of Contents

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:
 

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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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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