Document
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 June 30, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ¨                                               
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 August 2, 2017
Class A common stock, $0.00001 par value
  
72,492,923
Class B common stock, $0.00001 par value
  
47,254,360
 

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, unaudited)

 
 
June 30,
2017
 
December 31,
2016
Assets
 
 
 
 
Cash and cash equivalents
 
$
246,477

 
$
300,179

Restricted cash
 
1,611

 
1,633

Total cash, cash equivalents, and restricted cash
 
248,088

 
301,812

Owned inventory
 
3,196,024

 
3,010,967

Real estate not owned under option agreements
 
4,003

 
6,252

Total real estate inventory
 
3,200,027

 
3,017,219

Land deposits
 
52,977

 
37,233

Mortgage loans held for sale
 
110,906

 
233,184

Derivative assets
 
1,797

 
2,291

Prepaid expenses and other assets, net
 
76,244

 
73,425

Other receivables, net
 
101,453

 
115,246

Investments in unconsolidated entities
 
178,878

 
157,909

Deferred tax assets, net
 
212,925

 
206,634

Property and equipment, net
 
5,933

 
6,586

Intangible assets, net
 
2,660

 
3,189

Goodwill
 
66,198

 
66,198

Total assets
 
$
4,258,086

 
$
4,220,926

Liabilities
 
 
 
 
Accounts payable
 
$
168,568

 
$
136,636

Accrued expenses and other liabilities
 
175,561

 
209,202

Income taxes payable
 
12,035

 
10,528

Customer deposits
 
182,440

 
111,573

Senior notes, net
 
1,238,635

 
1,237,484

Loans payable and other borrowings
 
152,762

 
150,485

Revolving credit facility borrowings
 
—

 
—

Mortgage warehouse borrowings
 
63,150

 
198,564

Liabilities attributable to real estate not owned under option agreements
 
4,003

 
6,252

Total liabilities
 
1,997,154

 
2,060,724

COMMITMENTS AND CONTINGENCIES (Note 16)
 

 

Stockholders’ Equity
 
 
 
 
Class A common stock, $0.00001 par value, 400,000,000 shares authorized,
75,346,356 and 33,340,291 shares issued, 72,492,923 and 30,486,858 shares outstanding as of June 30, 2017 and December 31, 2016, respectively
 
1

 
—

Class B common stock, $0.00001 par value, 200,000,000 shares authorized,
47,254,360 and 88,942,052 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively
 
—

 
1

Preferred stock, $0.00001 par value, 50,000,000 shares authorized, no shares issued and outstanding as of June 30, 2017 and December 31, 2016
 
—

 
—

Additional paid-in capital
 
1,140,230

 
384,709

Treasury stock at cost; 2,853,433 shares as of June 30, 2017 and December 31, 2016
 
(43,524
)
 
(43,524
)
Retained earnings
 
265,782

 
228,613

Accumulated other comprehensive loss
 
(17,989
)
 
(17,989
)
Total stockholders’ equity attributable to Taylor Morrison Home Corporation
 
1,344,500

 
551,810

Non-controlling interests – joint ventures
 
1,623

 
1,525

Non-controlling interests – Principal Equityholders
 
914,809

 
1,606,867

Total stockholders’ equity
 
2,260,932

 
2,160,202

Total liabilities and stockholders’ equity
 
$
4,258,086

 
$
4,220,926


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
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Home closings revenue, net
 
$
889,096

 
$
829,882

 
$
1,640,581

 
$
1,458,969

Land closings revenue
 
3,764

 
10,936

 
7,120

 
17,540

Mortgage operations revenue
 
15,634

 
13,498

 
29,883

 
23,136

Total revenues
 
908,494

 
854,316

 
1,677,584

 
1,499,645

Cost of home closings
 
724,505

 
679,685

 
1,340,800

 
1,194,217

Cost of land closings
 
2,467

 
6,686

 
4,867

 
12,318

Mortgage operations expenses
 
10,102

 
8,193

 
18,804

 
14,717

Total cost of revenues
 
737,074

 
694,564

 
1,364,471

 
1,221,252

Gross margin
 
171,420

 
159,752

 
313,113

 
278,393

Sales, commissions and other marketing costs
 
61,516

 
59,182

 
117,133

 
107,023

General and administrative expenses
 
33,894

 
31,710

 
67,022

 
61,134

Equity in income of unconsolidated entities
 
(3,071
)
 
(2,305
)
 
(4,156
)
 
(3,087
)
Interest income, net
 
(89
)
 
(15
)
 
(179
)
 
(102
)
Other expense, net
 
764

 
3,412

 
413

 
6,666

Income before income taxes
 
78,406

 
67,768

 
132,880

 
106,759

Income tax provision
 
22,476

 
22,104

 
41,349

 
34,991

Net income before allocation to non-controlling interests
 
55,930

 
45,664

 
91,531

 
71,768

Net income attributable to non-controlling interests — joint ventures
 
(207
)
 
(296
)
 
(198
)
 
(480
)
Net income before non-controlling interests — Principal Equityholders
 
55,723

 
45,368

 
91,333

 
71,288

Net income attributable to non-controlling interests — Principal Equityholders
 
(28,322
)
 
(33,683
)
 
(54,164
)
 
(52,790
)
Net income available to Taylor Morrison Home Corporation
 
$
27,401

 
$
11,685

 
$
37,169

 
$
18,498

Earnings per common share
 
 
 
 
 
 
 
 
Basic
 
$
0.46

 
$
0.37

 
$
0.76

 
$
0.58

Diluted
 
$
0.46

 
$
0.37

 
$
0.76

 
$
0.58

Weighted average number of shares of common stock:
 
 
 
 
 
 
 
 
Basic
 
58,977

 
31,574

 
48,822

 
31,742

Diluted
 
121,061

 
121,052

 
120,895

 
121,217


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 June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Income before non-controlling interests, net of tax
 
$
55,930

 
$
45,664

 
$
91,531

 
$
71,768

Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
 
Post-retirement benefits adjustments, net of tax
 
—

 
—

 
—

 
(447
)
Other comprehensive loss, net of tax
 
—

 
—

 
—

 
(447
)
Comprehensive income
 
55,930

 
45,664

 
91,531

 
71,321

Comprehensive income attributable to non-controlling interests — joint ventures
 
(207
)
 
(296
)
 
(198
)
 
(480
)
Comprehensive income attributable to non-controlling interests — Principal Equityholders
 
(28,322
)
 
(33,683
)
 
(54,164
)
 
(52,461
)
Comprehensive income available to Taylor Morrison Home Corporation
 
$
27,401

 
$
11,685

 
$
37,169

 
$
18,380


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
 
Treasury Stock
 
Stockholders' Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Amount
 
Shares
 
Amount
 
Retained
Earnings
 
Accumulated 
Other
Comprehensive
Loss
 
Non-controlling
Interest - Joint
Venture
 
Non-controlling
Interest - Principal
Equityholders
 
Total
Stockholders’
Equity
Balance – December 31, 2016
 
30,486,858

 
$
—

 
88,942,052

 
$
1

 
$
384,709

 
2,853,433

 
$
(43,524
)
 
$
228,613

 
$
(17,989
)
 
$
1,525

 
$
1,606,867

 
$
2,160,202

Net income
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
37,169

 
—

 
198

 
54,164

 
91,531

Exchange of New TMM Units and corresponding number of Class B Common Stock
 
186,100

 
—

 
(186,100
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

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

 
—

 
(1,592
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Exercise of stock options
 
261,336

 
—

 
—

 
—

 
4,734

 
—

 
—

 
—

 
—

 
—

 
—

 
4,734

Issuance of restricted stock units, net of shares withheld for tax
 
58,629

—

—

—

—

—

—

—

(289
)
—

—

—

—

—

—

—

—

—

—

—

—

—

(289
)
Exchange of (repurchase) of B shares from secondary offerings
 
41,500,000

 
1

 
—

 
—

 
748,197

 
—

 
—

 
—

 
—

 
—

 
—

 
748,198

Repurchase of New TMM Units from principal equityholders
 
—

 
—

 
(41,500,000
)
 
(1
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(750,193
)
 
(750,194
)
Share based compensation
 
—

 
—

 
—

 
—

 
2,879

 
—

 
—

 
—

 
—

 
—

 
3,971

 
6,850

Changes in non-controlling interests of consolidated joint ventures
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(100
)
 
—

 
(100
)
Balance – June 30, 2017
 
72,492,923

 
$
1

 
47,254,360

 
$
—

 
$
1,140,230

 
2,853,433

 
$
(43,524
)
 
$
265,782

 
$
(17,989
)
 
$
1,623

 
$
914,809

 
$
2,260,932


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)

 
 
Six Months Ended June 30,
 
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income before allocation to non-controlling interests
 
$
91,531

 
$
71,768

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 

Equity in income of unconsolidated entities
 
(4,156
)
 
(3,087
)
Stock compensation expense
 
6,850

 
5,917

Distributions of earnings from unconsolidated entities
 
3,496

 
1,673

Depreciation and amortization
 
2,097

 
1,974

Debt issuance costs amortization
 
1,909

 
1,933

Contingent consideration
 
613

 
2,349

Deferred income taxes
 
(6,291
)
 
(969
)
Changes in operating assets and liabilities:
 

 

Real estate inventory and land deposits
 
(200,801
)
 
(62,906
)
Mortgages held for sale, prepaid expenses and other assets
 
132,989

 
43,734

Customer deposits
 
70,867

 
47,049

Accounts payable, accrued expenses and other liabilities
 
(641
)
 
(21,584
)
Income taxes payable
 
1,507

 
(22,185
)
Net cash provided by operating activities
 
99,970

 
65,666

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 

Purchase of property and equipment
 
(915
)
 
(187
)
Payments for business acquisitions
 
—

 
(52,819
)
Distributions of capital from unconsolidated entities
 
3,295

 
1,656

Investments of capital into unconsolidated entities
 
(23,604
)
 
(21,638
)
Net cash (used in) investing activities
 
(21,224
)
 
(72,988
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 

Increase in loans payable and other borrowings
 
8,643

 
36,631

Repayments of loans payable and other borrowings
 
(8,047
)
 
(30,529
)
Borrowings on revolving credit facility
 
—

 
240,000

Payments on revolving credit facility
 
—

 
(140,000
)
Borrowings on mortgage warehouse
 
388,353

 
527,027

Repayment on mortgage warehouse
 
(523,767
)
 
(592,372
)
Payment of contingent consideration
 
—

 
(3,100
)
Proceeds from stock option exercises
 
4,734

 
—

Proceeds from issuance of shares from secondary offerings
 
882,306

 


Repurchase of shares from principal equity holders
 
(884,303
)
 
—

Repurchase of common stock, net
 
—

 
(24,710
)
Payment of taxes related to net share settlement of equity awards
 
(289
)
 
—

Distributions to (contributions from) non-controlling interests of consolidated joint ventures, net
 
(100
)
 
86

Net cash (used in) provided by financing activities
 
(132,470
)
 
13,033

NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
 
$
(53,724
)
 
$
5,711

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period
 
301,812

 
127,468

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — End of period
 
$
248,088

 
$
133,179

SUPPLEMENTAL CASH FLOW INFORMATION:
 

 

Income taxes paid, net
 
$
(46,133
)
 
$
(58,144
)
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
 

 

Change in loans payable issued to sellers in connection with land purchase contracts
 
$
31,305

 
$
22,708

Change in inventory not owned
 
$
(2,249
)
 
$
(7,309
)
Original accrual of contingent consideration for business combinations

 
$
—

 
$
380



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. As of June 30, 2017, we operated in Arizona, California, Colorado, Florida, Georgia, Illinois, North Carolina, and Texas. Our Company serves a wide array of consumer groups from coast to coast, including first time, move-up, luxury, and 55 plus buyers. Our homebuilding company operates under our Taylor Morrison and Darling Homes brand names. Our business is organized into multiple homebuilding operating components, and a mortgage operating component, all of which are managed as four reportable segments: East, Central, West, and Mortgage Operations. The communities in our homebuilding segments offer single family attached and 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, operating as Taylor Morrison Home Funding, LLC (“TMHF”), and title services through our wholly owned title services subsidiary, Inspired Title Services, LLC (“Inspired Title”).

During the quarter ended March 31, 2017, we realigned our homebuilding operating divisions within our existing segments based on geographic location and management's long term strategic plans. As a result, all historical periods presented in the segment information have been reclassified to give effect to this segment realignment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation — The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles 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 2016 Annual Report on Form 10-K. In the opinion of management, the accompanying Unaudited 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 loss in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Stockholders’ Equity.

Non-controlling interests – In connection with a series of transactions consummated at the time of the Company’s IPO (the “Reorganization Transactions”), the Company became the sole owner of the general partner of TMM Holdings II Limited Partnership (“New TMM”). As the sole owner of 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 a consortium of investors comprised of affiliates of TPG Global, LLC (the “TPG Entities” or “TPG”), investment funds managed by Oaktree Capital Management, L.P. (“Oaktree”) or their respective subsidiaries (the “Oaktree Entities”), and affiliates of JH Investments, Inc. (“JH” and together with the TPG Entities and Oaktree Entities, the “Principal Equityholders”) or by members of management and members of the Board of Directors. Refer to Note 11- Stockholders' Equity for discussion regarding our equity offering transactions during the six months ended June 30, 2017.

Reclassifications - Prior period amounts for cash, cash equivalents, and restricted cash on the Condensed Consolidated Statements of Cash Flows have been reclassified to conform with current period financial statement presentation as a result of adopting Accounting Standards Update ("ASU") 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash.

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 goodwill, 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.


7
Table of Contents

Non-controlling Interests – Principal Equityholders — Immediately prior to our IPO, as part of the Reorganization Transactions, the existing holders of limited partnership interests of TMM Holdings Limited Partnership (“TMM Holdings”) 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.

During the six months ended June 30, 2017, we completed multiple sales of our Class A Common Stock in registered public offerings, totaling 41.5 million shares. We used all of the net proceeds from the public offerings to purchase partnership units in New TMM, our direct subsidiary, along with shares of our Class B Common Stock, held by our Principal Equityholders. As a result of all net proceeds being distributed to our Principal Equityholders, we adjusted Non-controlling interests - Principal Equityholders and Additional paid-in capital on the Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Stockholders' Equity to reflect the change in ownership. The aggregate number of partnership units and corresponding shares of Class B Common Stock we purchased was equal to the number of shares of Class A Common Stock sold in the public offerings. Refer to Note 11- Stockholders' Equity for discussion regarding our equity offering transactions during the six months ended June 30, 2017.

Real Estate Inventory —We assess the recoverability of our land inventory in accordance with the provisions of ASC Topic 360, “Property, Plant, and Equipment.” We review our real estate inventory for indicators of impairment by community during each reporting period. If indicators of impairment are present for a community, we first perform an undiscounted cash flow analysis to determine if the carrying value of the assets in that community exceeds the expected undiscounted cash flows. Generally, if the carrying value of the assets exceeds their estimated undiscounted cash flows, then the assets are deemed to be impaired and are recorded at fair value as of the assessment. Our determination of fair value is based on a discounted cash flow model which includes projections and estimates relating to sales prices, construction costs, sales pace, and other factors. Changes in these expectations may lead to a change in the outcome of our impairment analysis, and actual results may also differ from our assumptions. For the three and six months ended June 30, 2017 and 2016, no impairment charges were recorded.

Investments in Unconsolidated Entities —We evaluate our investments in unconsolidated entities for indicators of impairment. A series of operating losses of an investee or other factors may indicate that a decrease in value of our investment in the unconsolidated entity has occurred which is other-than-temporary. The amount of impairment recognized is the excess of the investment’s carrying amount over its estimated fair value. Additionally, we consider various qualitative factors to determine if a decrease in the value of the investment is other-than-temporary. These factors include age of the venture, stage in its life cycle, our intent and ability to recover our investment in the unconsolidated entity, financial condition and long-term prospects of the unconsolidated entity, short-term liquidity needs of the unconsolidated entity, trends in the general economic environment of the land, entitlement status of the land held by the unconsolidated entity, overall projected returns on investment, defaults under contracts with third parties (including bank debt), recoverability of the investment through future cash flows and relationships with the other partners. If the Company believes that the decline in the fair value of the investment is temporary, then no impairment is recorded. We did not record any impairment charges for the three and six months ended June 30, 2017 or 2016.

Revenue Recognition
Home closings revenue, net — Home closings revenue is recorded using the completed-contract method of accounting at the time each home is delivered, title and possession are transferred to the buyer, we have no significant continuing involvement with the home, risk of loss has transferred, the buyer has demonstrated sufficient investment in the property, and the receivable, if any, from the homeowner or escrow agent is not subject to future subordination.

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

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


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

Recently Issued Accounting Pronouncements — In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 from the goodwill impairment test. This change will allow an entity to avoid calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination, thus reducing the cost and complexity of evaluating goodwill for impairment. This amendment will be effective for us in our fiscal year beginning January 1, 2020. We are currently evaluating the impact the adoption of ASU 2017-04 will have on our condensed consolidated financial statements and disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"). ASU 2017-01 provides clarification on the definition of a business by providing a screen to determine when a set of assets is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets is not a business. This screen is expected to reduce the number of transactions that need to be further evaluated. This amendment will be effective for us in our fiscal year beginning January 1, 2018. As ASU 2017-01 is not retroactive, we do not believe such guidance will have a significant impact on our condensed consolidated financial statements and disclosures. Once adopted, we will evaluate the impact ASU 2017-01 will have on our condensed consolidated financial statements and disclosures in the event of future acquisitions.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 primarily impacts off-balance sheet operating leases and will require such leases, with the exception of short-term leases, to be recorded on the balance sheet. Lessor accounting is not significantly impacted by the new guidance, however certain updates were made to align lessee and lessor treatment. ASU 2016-02 will be effective for us in our fiscal year beginning January 1, 2019. We do not believe the adoption of ASU 2016-02 will have a material impact on our condensed consolidated financial statements and disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“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 an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. In doing so, entities will generally need to use more judgment and make more estimates than under current 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 the modified retrospective approach. We are currently conducting a company-wide initiative to prepare for implementation of this guidance. We do not believe the adoption of this pronouncement will have a material impact on our condensed consolidated financial statements and disclosures, except as it relates to the newly required transition disclosures and potential new revenue recognition footnote disclosures required by the new standard. We also believe the adoption of this pronouncement will not materially affect our post-adoption revenue recognition since we have limited circumstances where we have separate performance obligations within our contracts.


3. BUSINESS COMBINATIONS

On January 8, 2016, we acquired Acadia Homes, an Atlanta based homebuilder, for total consideration of $83.6 million (including $19.7 million of seller financing holdbacks and contingent consideration). In accordance with ASC Topic 805, Business Combinations, all material assets and liabilities, including contingent consideration were measured and recognized at fair value as of the date of the acquisition to reflect the purchase price paid, which resulted in goodwill for the transaction.

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Unaudited pro forma results of the business combination as if Acadia Homes had been acquired on January 1, 2016 have not been provided as they are immaterial to the total Company's consolidated results of operations.

We determined the estimated 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, and overhead costs, all of which may vary significantly between communities.

The Company performed a final allocation of purchase price as of the acquisition date for Acadia Homes. The following is a summary of the fair value of assets acquired, liabilities assumed, and liabilities created (in thousands):
(In thousands)
Acadia Homes
Acquisition Date
January 8, 2016
Assets acquired
 
Real estate inventory
$
76,152

Land deposits
984

Prepaid expenses and other assets
816

Property and equipment
204

Goodwill (1)
8,500

Total assets
$
86,656

 
 
Less liabilities assumed
 
Accrued expenses and other liabilities
$
2,562

Customer deposits
463

Net assets acquired
$
83,631

(1) Goodwill is fully deductible for tax purposes. The goodwill was allocated to our East homebuilding segment.


4. EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income available to TMHC by the weighted average number of shares 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 shares of Class A Common Stock and if all outstanding equity awards to issue shares of Class A Common Stock were exercised or settled.
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
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
 
Net income available to TMHC – basic
 
$
27,401

 
$
11,685

 
$
37,169

 
$
18,498

Net income attributable to non-controlling interest – Principal Equityholders
 
28,322

 
33,683

 
54,164

 
52,790

Loss fully attributable to public holding company
 
125

 
100

 
152

 
173

Net income – diluted
 
$
55,848

 
$
45,468

 
$
91,485

 
$
71,461

Denominator:
 
 
 
 
 
 
 
 
Weighted average shares – basic (Class A)
 
58,977

 
31,574

 
48,822

 
31,742

Weighted average shares – Principal Equityholders’ non-controlling interest (Class B)
 
60,630

 
89,107

 
70,766

 
89,107

Restricted stock units
 
1,075

 
366

 
976

 
367

Stock Options
 
379

 
5

 
331

 
1

Weighted average shares – diluted
 
121,061

 
121,052

 
120,895

 
121,217

Earnings per common share – basic:
 
 
 
 
 
 
 
 
Net income available to Taylor Morrison Home Corporation
 
$
0.46

 
$
0.37

 
$
0.76

 
$
0.58

Earnings per common share – diluted:
 
 
 
 
 
 
 
 
Net income available to Taylor Morrison Home Corporation
 
$
0.46

 
$
0.37

 
$
0.76

 
$
0.58

We excluded a total weighted average of anti-dilutive 1,660,683 and 1,602,935 stock options and unvested restricted stock units (“RSUs”) and 1,926,724 and 2,361,178 stock options and unvested RSUs from the calculation of earnings per share for the three and six months ended June 30, 2017 and 2016, respectively.
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.
5. REAL ESTATE INVENTORY AND LAND DEPOSITS
Inventory consists of the following (in thousands):
 
 
As of
 
 
June 30,
2017
 
December 31, 2016
Real estate developed and under development
 
$
2,155,644

 
$
2,074,651

Real estate held for development or held for sale (1)
 
164,951

 
183,638

Operating communities (2)
 
774,939

 
650,036

Capitalized interest
 
100,490

 
102,642

Total owned inventory
 
3,196,024

 
3,010,967

Real estate not owned under option agreements
 
4,003

 
6,252

Total real estate inventory
 
$
3,200,027

 
$
3,017,219

(1) Real estate held for development or held for sale includes properties which are not in active production. This includes raw land recently purchased or awaiting entitlement, future phases of current projects that will be developed as prior phases sell out and long-term strategic assets.
(2) Operating communities consist of all vertical construction costs relating to homes in progress and completed homes for all active production of inventory.


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The development status of our land inventory is as follows (dollars in thousands):
 
 
 
As of
 
 
June 30, 2017
 
December 31, 2016
 
 
Owned Lots
 
Book Value of Land
and Development
 
Owned Lots
 
Book Value of Land
and Development
Raw
 
4,875

 
$
252,280

 
7,142

 
$
403,902

Partially developed
 
9,893

 
744,616

 
8,037

 
501,496

Finished
 
11,412

 
1,309,885

 
11,318

 
1,336,709

Long-term strategic assets
 
1,196

 
13,814

 
1,489

 
16,182

Total
 
27,376

 
$
2,320,595

 
27,986

 
$
2,258,289


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 June 30, 2017 and December 31, 2016, we had the right to purchase 7,331 and 7,583 lots under land option purchase contracts, respectively, for an aggregate purchase price of $523.5 million and $542.6 million as of June 30, 2017 and December 31, 2016, respectively. We do not have title to the properties, and the creditors generally have no recourse against the Company. As of June 30, 2017 and December 31, 2016, our exposure to loss related to our option contracts with third parties and unconsolidated entities consist of non-refundable option deposits totaling $53.0 million and $37.2 million, respectively, in land deposits related to land options and land purchase contracts.

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

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Interest capitalized - beginning of period
 
$
103,059

 
$
110,962

 
$
102,642

 
$
105,148

Interest incurred
 
20,711

 
22,201

 
41,425

 
44,445

Interest amortized to cost of home closings
 
(23,280
)
 
(22,100
)
 
(43,577
)
 
(38,530
)
Interest capitalized - end of period
 
$
100,490

 
$
111,063

 
$
100,490

 
$
111,063


6. INVESTMENTS IN UNCONSOLIDATED ENTITIES
We have investments 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. Some of these joint ventures develop land for the sole use of the joint 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.

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

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As of
 
 
June 30,
2017
 
December 31,
2016
Assets:
 
 
 
 
Real estate inventory
 
$
735,093

 
$
614,441

Other assets
 
125,802

 
171,216

Total assets
 
$
860,895

 
$
785,657

Liabilities and owners’ equity:
 
 
 
 
Debt
 
$
316,970

 
$
277,934

Other liabilities
 
22,552

 
22,603

Total liabilities
 
339,522

 
300,537

Owners’ equity:
 
 
 
 
TMHC
 
178,878

 
157,909

Others
 
342,495

 
327,211

Total owners’ equity
 
521,373

 
485,120

Total liabilities and owners’ equity
 
$
860,895

 
$
785,657


 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues
 
$
64,260

 
$
37,042

 
$
87,253

 
$
49,662

Costs and expenses
 
(50,937
)
 
(30,110
)
 
(71,041
)
 
(40,220
)
Net income of unconsolidated entities
 
$
13,323

 
$
6,932

 
$
16,212

 
$
9,442

TMHC’s share in income of unconsolidated entities
 
$
3,071

 
$
2,305

 
$
4,156

 
$
3,087

Distributions from unconsolidated entities
 
$
5,052

 
$
3,218

 
$
6,791

 
$
3,329



7. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following (in thousands):

 
 
As of
June 30, 2017
 
As of
December 31, 2016
Real estate development costs to complete
 
$
11,336

 
$
15,156

Compensation and employee benefits
 
45,681

 
63,802

Self-insurance and warranty reserves
 
54,084

 
50,550

Interest payable
 
16,991

 
17,233

Property and sales taxes payable
 
8,769

 
17,231

Other accruals
 
38,700

 
45,230

Total accrued expenses and other liabilities
 
$
175,561

 
$
209,202


Self-Insurance and Warranty Reserves – We accrue for the expected costs associated with the limited one year warranty, deductibles and self-insured amounts under our various insurance policies within Beneva Indemnity Company ("Beneva"), a wholly owned subsidiary. A summary of the changes in our reserves are as follows (in thousands):

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Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Reserve - beginning of period
 
$
52,416

 
$
43,195

 
$
50,550

 
$
43,098

Additions to reserves
 
6,744

 
5,015

 
11,043

 
10,783

Costs and claims incurred
 
(6,593
)
 
(5,962
)
 
(9,928
)
 
(12,547
)
Change in estimates to existing reserves
 
1,517

 
2,094

 
2,419

 
3,008

Reserve - end of period
 
$
54,084

 
$
44,342

 
$
54,084

 
$
44,342


8. DEBT
Total debt consists of the following (in thousands):
 
 
As of
 
 
June 30, 2017
 
December 31, 2016
 
 
Principal
 
Unamortized Debt Issuance Costs
 
Carrying Value
 
Principal
 
Unamortized Debt Issuance Costs
 
Carrying Value
5.25% Senior Notes due 2021, unsecured
 
$
550,000

 
$
4,491

 
$
545,509

 
$
550,000

 
$
5,089

 
$
544,911

5.875% Senior Notes due 2023, unsecured
 
350,000

 
3,285

 
346,715

 
350,000

 
3,569

 
346,431

5.625% Senior Notes due 2024, unsecured
 
350,000

 
3,589

 
346,411

 
350,000

 
3,858

 
346,142

Senior Notes subtotal
 
1,250,000

 
11,365

 
1,238,635

 
1,250,000

 
12,516

 
1,237,484

Loans payable and other borrowings
 
152,762

 
—

 
152,762

 
150,485

 
—

 
150,485

Revolving Credit Facility
 
—

 
—

 
—

 
—

 
—

 
—

Mortgage warehouse borrowings
 
63,150

 
—

 
63,150

 
198,564

 
—

 
198,564

Total Senior Notes and bank financing
 
$
1,465,912

 
$
11,365

 
$
1,454,547

 
$
1,599,049

 
$
12,516

 
$
1,586,533


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 their homebuilding subsidiaries (collectively, the “Guarantors”), which are all subsidiaries directly or indirectly of TMHC. The 2021 Senior Notes and the related 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) 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.

The 2021 Senior Notes are redeemable at scheduled redemption prices, currently at 102.625%, of their principal amount (plus accrued and unpaid interest).

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 and the related guarantees are senior unsecured obligations 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 principal amount of 7.75% Senior Notes due 2020 (the “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.

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 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 and 2023 Senior Notes. The 2024 Senior Notes and the related 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 similar to the 2023 Senior Notes. The indenture governing the 2024 Senior Notes contains events of default that are similar to those contained in the indenture governing the 2021 and 2023 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 2023 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
Our $500.0 million Revolving Credit Facility matures on April 12, 2019. The Revolving Credit Facility is guaranteed by the same Guarantors that guarantee the 2021, 2023 and 2024 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 $1.6 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 the borrower, 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.


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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 June 30, 2017, we were in compliance with all of the covenants under the Revolving Credit Facility.


Mortgage Warehouse Borrowings
The following is a summary of our mortgage warehouse borrowings (in thousands):

 
 
As of June 30, 2017
Facility
 
Amount Drawn
 
Facility Amount
 
Interest Rate
 
Expiration Date
 
Collateral (1)
Flagstar
 
$
8,827

 
$
20,000

 
LIBOR + 2.5%
 
30 days written notice
 
Mortgage Loans
Comerica
 
17,419

 
50,000

 
LIBOR + 2.25%
 
November 16, 2017
 
Mortgage Loans
J.P. Morgan
 
36,904

 
100,000

 
LIBOR + 2.375%
 
September 26, 2017
 
Mortgage Loans and Pledged Cash
Total
 
$
63,150

 
$
170,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
Facility
 
Amount Drawn
 
Facility Amount
 
Interest Rate
 
Expiration Date
 
Collateral (1)
Flagstar
 
$
37,093

 
$
55,000

 
LIBOR + 2.5%
 
30 days written notice
 
Mortgage Loans
Comerica
 
57,875

 
85,000

 
LIBOR + 2.25%
 
November 16, 2017
 
Mortgage Loans
J.P. Morgan
 
103,596

 
125,000

 
LIBOR + 2.375% to 2.5%
 
September 26, 2017
 
Mortgage Loans and Pledged Cash
Total
 
$
198,564

 
$
265,000

 
 
 
(1) The mortgage warehouse borrowings outstanding as of June 30, 2017 and December 31, 2016 were collateralized by a) $110.9 million and $233.2 million, respectively, of mortgage loans held for sale, which comprised the balance of mortgage loans held for sale and b) approximately $1.6 million and $1.6 million, respectively, which are included in restricted cash in the accompanying Condensed Consolidated Balance Sheets.

Loans Payable and Other Borrowings
Loans payable and other borrowings as of June 30, 2017 and December 31, 2016 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 June 30, 2017 and December 31, 2016. We impute interest for loans with no stated interest rates.

9. 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.


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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 derivative assets includes interest rate lock commitments (“IRLCs”) and mortgage backed securities (“MBS”). The fair value of IRLCs is based on the value of the underlying mortgage loan, quoted MBS prices and the probability that the mortgage loan will fund within the terms of the IRLCs. We estimate the fair value of the forward sales commitments based on quoted MBS prices. The fair value of our mortgage warehouse 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 using a Monte Carlo simulation model under the option pricing method. As the measurement of the contingent consideration is based primarily on significant inputs not observable in the market, it represents a Level 3 measurement. There were no changes to or transfers between the levels of the fair value hierarchy for any of our financial instruments as of June 30, 2017, when compared to December 31, 2016.

The carrying value and fair value of our financial instruments are as follows:
 
 
 
 
June 30, 2017
 
December 31, 2016
(Dollars in thousands)
 
Level in Fair
Value Hierarchy
 
Carrying
Value
 
Estimated
Fair
Value
 
Carrying
Value
 
Estimated
Fair
Value
Description:
 
 
 
 
 
 
 
 
 
 
Mortgage loans held for sale
 
2
 
$
110,906

 
$
110,906

 
$
233,184

 
$
233,184

Derivative assets
 
2
 
1,797

 
1,797

 
2,291

 
2,291

Mortgage warehouse borrowings
 
2
 
63,150

 
63,150

 
198,564

 
198,564

Loans payable and other borrowings
 
2
 
152,762

 
152,762

 
150,485

 
150,485

5.25% Senior Notes due 2021 (1)
 
2
 
545,509

 
563,750

 
544,911

 
563,750

5.875% Senior Notes due 2023 (1)
 
2
 
346,715

 
373,625

 
346,431

 
355,250

5.625% Senior Notes due 2024 (1)
 
2
 
346,411

 
365,750

 
346,142

 
353,500

Revolving Credit Facility
 
2
 
—

 
—

 
—

 
—

Contingent consideration liability
 
3
 
5,205

 
5,205

 
17,200

 
17,200

(1) Carrying value for Senior Notes, as presented, includes unamortized debt issuance costs. Debt issuance costs are not factored into the fair value calculation for the Senior Notes.

Fair value measurements are used for inventories on a nonrecurring basis when events and circumstances indicate that their carrying value is not recoverable. The following table presents the fair value for our inventories measured at fair value on a nonrecurring basis as of the period presented.

(Dollars in thousands)
 
 
 
 
Description:
Level in
Fair Value
Hierarchy
 
 
December 31, 2016
Inventories (1)
3
 
 
$
3,778

(1) During the year ended December 31, 2016, we recorded $3.5 million of impairment charges.

As of June 30, 2017, the fair value for such inventories was not determined as there were no events and circumstances that indicated their carrying value is not recoverable.


10. INCOME TAXES

Our effective tax rate for the three and six months ended June 30, 2017 was 28.7% and 31.1%, respectively, compared to 32.6%

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and 32.8% for the same periods in 2016, respectively. For the three and six months ended June 30, 2017 and 2016, the effective tax rate differed from the U.S. federal statutory income tax rate primarily due to state income taxes, special deductions and credits relating to homebuilding activities, uncertain tax positions, and discrete tax adjustments related to certain deferred tax assets and liabilities.
 
At June 30, 2017 and December 31, 2016, we had $13.7 million and $7.8 million of cumulative gross unrecognized tax benefits, respectively. All unrecognized tax benefits, if recognized, would affect our effective tax rate. We had $0.6 million and $0.4 million of gross interest and penalties related to unrecognized tax positions accrued as of June 30, 2017 and December 31, 2016, respectively.

11. 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.

During the six months ended June 30, 2017, we completed multiple sales of our Class A Common Stock in registered public offerings. We used all of the net proceeds from these public offerings to purchase partnership units in New TMM, our direct subsidiary, along with shares of our Class B Common Stock, held by our Principal Equityholders. As a result of net proceeds being distributed to our Principal Equityholders, we adjusted Non-controlling interests - Principal Equityholders and Additional paid-in capital on the Condensed Consolidated Balance Sheets to reflect the change in ownership. The aggregate number of partnership units and corresponding shares of Class B Common Stock we purchased was equal to the number of shares of Class A Common Stock sold in the public offerings.
The following is a summary of the completed sales of our Class A Common Stock in registered public offerings.
(Shares presented in thousands)
 
 
 
Closing date
Number of shares
 
Net purchase price per share
February 6, 2017
11,500

 
$
18.2875

March 27, 2017
10,000

 
20.7800

May 5, 2017
10,000

 
23.1200

June 27, 2017
10,000

 
23.3000


The components and respective voting power of outstanding TMHC Common Stock including the effects of the secondary offerings at June 30, 2017 are as follows:

 
 
Shares
Outstanding
 
Percentage
Class A Common Stock
 
72,492,923

 
60.5
%
Class B Common Stock
 
47,254,360

 
39.5
%
Total
 
119,747,283

 
100
%

Stock Repurchase Program
Our Board of Directors has authorized the repurchase of up to $100.0 million of the Company’s Class A Common Stock through December 31, 2017 in open market purchases, privately negotiated transactions or other transactions. The stock repurchase program is subject to prevailing market conditions and other considerations, including our liquidity, the terms of our

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debt instruments, statutory requirements, planned land investment and development spending, acquisition and other investment opportunities and ongoing capital requirements. During the three and six months ended June 30, 2017, there were no shares repurchased. During the three and six months ended June 30, 2016, there were 1,333,873 and 1,671,633 shares repurchased for $19.7 million and $24.7 million, respectively. As of June 30, 2017, there was $56.4 million available to be used for repurchases.

12. 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 was most recently amended and restated in May 2017. The Plan provides for the grant of stock options, RSUs and other equity-based awards deliverable in shares of our Class A Common Stock. As of June 30, 2017, we had an aggregate of 8,978,206 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, all of which is included in general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Restricted stock units (1)
 
$
2,294

 
$
1,755

 
$
4,191

 
$
3,138

Stock options
 
1,188

 
1,061

 
2,146

 
2,018

New TMM units
 
356

 
381

 
513

 
761

Total stock compensation
 
$
3,838

 
$
3,197

 
$
6,850

 
$
5,917

(1) Includes compensation expense related to time-based RSUs and performance-based RSUs. Outstanding performance-based RSUs reflected in the table above are reported at target level of performance.

At June 30, 2017 and December 31, 2016, the aggregate unrecognized value of all outstanding stock-based compensation awards was approximately $27.0 million and $18.8 million, respectively.

Restricted Stock Units – The following table summarizes the time-based RSU and performance-based RSU activity for the six months ended June 30, 2017:
 
 
Shares
 
Weighted Average
Grant Date Fair
Value
Balance at December 31, 2016
 
1,358,701

 
$
13.39

Granted
 
644,629

 
18.04

Vested
 
(76,585
)
 
17.34

Forfeited
 
(37,559
)
 
13.41

Balance at June 30, 2017
 
1,889,186

 
$
14.82


During the three and six months ended June 30, 2017, we issued time-based RSU awards and performance-based RSU awards to certain employees and members of the Board of Directors of the Company.

Our time-based RSUs consist of awards that settle in shares of Class A Common Stock and have been awarded to our employees and members of our Board of Directors. Vesting of these RSUs is subject to continued employment with TMHC or an affiliate, or continued service on the Board of Directors, through the applicable vesting dates. Time-based RSUs granted to employees generally become vested with respect to 33% of the RSUs on the second, third, and fourth anniversaries of the grant date. Time-based RSUs granted to members of the Board of Directors generally become vested on the first anniversary of the grant date.

Additionally, we issued performance-based RSUs to certain employees of the Company. These awards will vest in full based on the achievement of certain performance goals over a three-year performance period, subject to the employee’s continued employment through the date the Compensation Committee certifies the applicable level of performance achieved and will be settled in shares of our Class A Common Stock. The number of shares that may be issued in settlement of the performance-

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based RSUs to the award recipients may be greater or lesser than the target award amount depending on actual performance achieved as compared to the performance targets set forth in the awards.

Stock Options – The following table summarizes the stock option activity for the six months ended June 30, 2017:
 
 
Shares
 
Weighted
Average Exercise
Price Per Share
Outstanding at December 31, 2016
 
2,431,347

 
$
17.09

Granted
 
785,132

 
19.03

Exercised
 
(261,336
)
 
18.12

Canceled/Forfeited
 
(54,912
)
 
17.86

Outstanding at June 30, 2017
 
2,900,231

 
$
17.52

Options exercisable at June 30, 2017
 
918,087

 
$
19.62


Options granted to employees vest and become exercisable ratably on the second, third, fourth and fifth anniversary of the date of grant. Options granted to members of the Board of Directors vested and became exercisable ratably on the first, second and third anniversary of the date of grant. Vesting of the options is subject to continued employment with TMHC or an affiliate, or continued service on the Board of Directors, through the applicable vesting dates, and options expire within ten years from the date of grant.

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.

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 held by members of management and members of our Board of Directors as of June 30, 2017 were as follows:
 
 
Class B Shares/New
TMM Units
 
Weighted
Average Grant  Date
Fair Value
Balance at December 31, 2016
 
1,146,357

 
$
5.58

Exchanges (1)
 
(186,100
)
 
5.27

Forfeited (2)
 
(1,592
)
 
8.04

Balance at June 30, 2017 (3)
 
958,665

 
$
5.64

(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.
(3) The number of vested and unexchanged New TMM Units as of June 30, 2017 was 936,695.

13. 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. Such transactions with related parties are typically conducted in the normal course of operations and are generally executed at arm’s length, as they are entered into at terms comparable to those entered into with unrelated third parties. For the three and six months ended June 30, 2017, we engaged in equity offering transactions with our principal equityholders. Refer to Note 11 - Stockholders' Equity for discussion regarding such transactions. During the three months ended June 30, 2017, we entered into a contract to purchase 140 home lots in Tustin, California for a total purchase price of $30.0 million from Intracorp Companies, which is owned and controlled by a member of the Board of Directors. For the three and six months ended June 30, 2016 there were no related-party transactions.

14. ACCUMULATED OTHER COMPREHENSIVE INCOME

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The table below provides the components of accumulated other comprehensive income (loss) (“AOCI”) for the periods presented (in thousands).
 
 
Three Months Ended June 30, 2017
 
 
Total Post-
Retirement
Benefits
Adjustments
 
Foreign
Currency
Translation
Adjustments
 
Non-controlling
Interest - Principal
Equityholders
Reclassification
 
Total
Balance, beginning of period
 
$
2,061

 
$
(63,448
)
 
$
43,398

 
$
(17,989
)
Gross amounts reclassified within accumulated other comprehensive income
 
—

 
11,489

 
(11,489
)
 
—

Balance, end of period
 
$
2,061

 
$
(51,959
)
 
$
31,909

 
$
(17,989
)

 
 
Six Months Ended June 30, 2017
 
 
Total Post-
Retirement
Benefits
Adjustments
 
Foreign
Currency
Translation
Adjustments
 
Non-controlling
Interest - Principal
Equityholders
Reclassification
 
Total
Balance, beginning of period
 
$
2,061

 
$
(79,927
)
 
$
59,877

 
$
(17,989
)
Gross amounts reclassified within accumulated other comprehensive income
 
—

 
27,968

 
(27,968
)
 
—

Balance, end of period
 
$
2,061

 
$
(51,959
)
 
$
31,909

 
$
(17,989
)

There was no activity in the three months ended June 30, 2016, therefore it is not presented.

 
 
Six Months Ended June 30, 2016
 
 
Total Post-
Retirement
Benefits
Adjustments
 
Foreign
Currency
Translation
Adjustments
 
Non-controlling
Interest - Principal
Equityholders
Reclassification
 
Total
Balance, beginning of period
 
$
2,305

 
$
(79,927
)
 
$
59,625

 
$
(17,997
)
Other comprehensive income before reclassifications
 
(447
)
 
—

 
—

 
(447
)
Other comprehensive income, net of tax
 
$
(447
)
 
$
—

 
$
—

 
$
(447
)
Gross amounts reclassified within accumulated other comprehensive income
 
—

 
—

 
329

 
329

Balance, end of period
 
$
1,858

 
$
(79,927
)
 
$
59,954

 
$
(18,115
)

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.

15. REPORTING SEGMENTS
We have multiple homebuilding operating components which 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 components into three reporting segments, East, Central, and West, based on similar long-term economic characteristics. We also have a mortgage and title services reporting segment. We have no inter-segment sales as all sales are to external customers.

During the quarter ended March 31, 2017, we realigned our homebuilding operating divisions within our existing segments based on geographic location and management's long term strategic plans. As a result, all historical periods presented in the segment information have been reclassified to give effect to this segment realignment.

Our reporting segments are as follows:
 

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East
Atlanta, Charlotte, Chicago, Orlando, Raleigh, Southwest Florida and Tampa
Central
Austin, Dallas and Houston (both include a Taylor Morrison division and a Darling Homes division), and Denver
West
Bay Area, Phoenix, Sacramento and Southern California
Mortgage Operations
Taylor Morrison Home Funding and Inspired Title

Segment information is as follows (in thousands):

 
 
Three Months Ended June 30, 2017
 
 
East
 
Central
 
West
 
Mortgage
Operations
 
Corporate
and
Unallocated
 
Total
Total revenues
 
$
320,053

 
$
267,562

 
$
305,245

 
$
15,634

 
$
—

 
$
908,494

 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin
 
68,988

 
48,413

 
48,487

 
5,532

 
—

 
171,420

Selling, general and administrative expenses
 
(29,337
)
 
(25,933
)
 
(18,854
)
 
—

 
(21,286
)
 
(95,410
)
Equity in income of unconsolidated entities
 
—

 
226

 
685

 
2,160

 
—

 
3,071

Interest and other (expense)/income, net
 
(129
)
 
602

 
(67
)
 
—

 
(1,081
)
 
(675
)
Income/(loss) before income taxes
 
$
39,522

 
$
23,308

 
$
30,251

 
$
7,692

 
$
(22,367
)
 
$
78,406


 
 
Three Months Ended June 30, 2016
 
 
East
 
Central
 
West
 
Mortgage
Operations
 
Corporate
and
Unallocated
 
Total
Total revenues
 
$
267,188

 
$
272,163

 
$
301,467

 
$
13,498

 
$
—

 
$
854,316

 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin
 
53,633

 
47,156

 
53,658

 
5,305

 
—

 
159,752

Selling, general and administrative expenses
 
(27,165
)
 
(25,272
)
 
(19,363
)
 
—

 
(19,092
)
 
(90,892
)
Equity in income/(loss) of unconsolidated entities
 
308

 
(164
)
 
740