Edgar Filing: Taylor Morrison Home Corp

(Shares presented in thousands)

Closing date

Number of shares

Net sale price per share

January 8, 2018

January 17, 2018 ⁽¹⁾

Document

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, 2018



¨	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		83-2026677
(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 every Interactive Data File required to be submitted 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 such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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	ý	Accelerated filer	¨

Non-accelerated filer	¨	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 October 31, 2018
Class A common stock, $0.00001 par value		118,678,633

Table of Contents

TAYLOR MORRISON HOME CORPORATION

TABLE OF CONTENTS



	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements of Taylor Morrison Home Corporation (Unaudited)	3

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	3

Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2018 and 2017	4

Condensed Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 2018 and 2017	5

Condensed Consolidated Statement of Stockholders’ Equity for the nine month period ended September 30, 2018	6

Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2018 and 2017	7

Notes to the Unaudited Condensed Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3. Quantitative and Qualitative Disclosures About Market Risk	45

Item 4. Controls and Procedures	46

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	47

Item 1A. Risk Factors	47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3. Defaults Upon Senior Securities	47

Item 4. Mine Safety Disclosures	47

Item 5. Other Information	47

Item 6. Exhibits	48

SIGNATURES	50

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NOTE REGARDING THIS QUARTERLY REPORT

On October 26, 2018, Taylor Morrison Home II Corporation, a Delaware corporation formerly known as Taylor Morrison Home Corporation (“Original Taylor Morrison”) completed a holding company reorganization (the “Reorganization”), which resulted in a new parent company (“New Taylor Morrison”) owning all of the outstanding common stock of Original Taylor Morrison. New Taylor Morrison assumed the name Taylor Morrison Home Corporation. Consequently, Original Taylor Morrison became a direct, wholly-owned subsidiary of New Taylor Morrison. In the holding company reorganization, Original Taylor Morrison’s stockholders became stockholders of New Taylor Morrison, on a one-for-one basis, with the same number of shares and same ownership percentage of the corresponding class of Original Taylor Morrison common stock that they held immediately prior to the holding company reorganization.

New Taylor Morrison, as the successor issuer to Original Taylor Morrison (pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), began making filings under the Securities Act of 1933, as amended, and the Exchange Act on October 26, 2018.

The business, executive officers and directors of New Taylor Morrison immediately following the Reorganization were identical to the business, executive officers and directors of Original Taylor Morrison immediately prior to the Reorganization.

References to “Taylor Morrison Home Corporation”, “ the Company”, “we”, “us”, or “our” in this Quarterly Report on Form 10-Q (including in the consolidated financial statements and condensed notes thereto in this report) have the following meanings, unless the context otherwise requires:

For periods prior to October 26, 2018: Original Taylor Morrison and its subsidiaries.

For periods from and after October 26, 2018: New Taylor Morrison and its subsidiaries.

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TAYLOR MORRISON HOME CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts, unaudited)



	September 30, 2018			December 31, 2017
Assets
Cash and cash equivalents	$	382,054		$	573,925
Restricted cash	1,319			1,578
Total cash, cash equivalents, and restricted cash	383,373			575,503
Owned inventory	3,255,300			2,956,709
Real estate not owned	13,811			2,527
Total real estate inventory	3,269,111			2,959,236
Land deposits	47,855			49,768
Mortgage loans held for sale	83,751			187,038
Derivative assets	2,329			1,584
Prepaid expenses and other assets, net	56,828			72,334
Other receivables, net	98,048			94,488
Investments in unconsolidated entities	179,249			192,364
Deferred tax assets, net	105,356			118,138
Property and equipment, net	38,258			7,112
Intangible assets, net	1,337			2,130
Goodwill	66,198			66,198
Total assets	$	4,331,693		$	4,325,893
Liabilities
Accounts payable	$	124,731		$	140,165
Accrued expenses and other liabilities	188,681			201,540
Income taxes payable	—			4,525
Customer deposits	189,116			132,529
Senior notes, net	1,241,514			1,239,787
Loans payable and other borrowings	160,173			139,453
Revolving credit facility borrowings	—			—
Mortgage warehouse borrowings	54,457			118,822
Liabilities attributable to real estate not owned	13,811			2,527
Total liabilities	1,972,483			1,979,348
COMMITMENTS AND CONTINGENCIES (Note 15)
Stockholders’ Equity
Class A common stock, $0.00001 par value, 400,000,000 shares authorized, 114,458,190 and 85,449,253 shares issued, 111,408,931 and 82,399,996 shares outstanding as of September 30, 2018 and December 31, 2017, respectively	1			1
Class B common stock, $0.00001 par value, 200,000,000 shares authorized, 863,434 and 37,179,616 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively	—			—
Preferred stock, $0.00001 par value, 50,000,000 shares authorized, no shares issued and outstanding as of September 30, 2018 and December 31, 2017	—			—
Additional paid-in capital	1,881,273			1,341,873
Treasury stock at cost, 3,049,257 shares as of September 30, 2018 and December 31, 2017	(47,622		)	(47,622		)
Retained earnings	517,780			319,833
Accumulated other comprehensive loss	(17,968		)	(17,968		)
Total stockholders’ equity attributable to Taylor Morrison Home Corporation	2,333,464			1,596,117
Non-controlling interests – joint ventures	4,504			1,663
Non-controlling interests	21,242			748,765
Total stockholders’ equity	2,359,210			2,346,545
Total liabilities and stockholders’ equity	$	4,331,693		$	4,325,893

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

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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,
	2018			2017			2018			2017
Home closings revenue, net	$	1,014,168		$	886,249		$	2,703,692		$	2,526,830
Land closings revenue	5,170			4,299			18,335			11,419
Financial services revenue	17,041			17,479			47,513			47,362
Total revenues	1,036,379			908,027			2,769,540			2,585,611
Cost of home closings	822,950			721,637			2,202,377			2,062,437
Cost of land closings	3,979			3,002			14,704			7,869
Financial services expenses	10,451			12,070			31,647			30,874
Total cost of revenues	837,380			736,709			2,248,728			2,101,180
Gross margin	198,999			171,318			520,812			484,431
Sales, commissions and other marketing costs	67,504			61,476			185,806			178,609
General and administrative expenses	33,016			33,374			101,795			100,396
Equity in income of unconsolidated entities	(2,514		)	(2,787		)	(9,777		)	(6,943		)
Interest income, net	(670		)	(135		)	(1,289		)	(314		)
Other expense, net	798			415			4,889			828
Income before income taxes	100,865			78,975			239,388			211,855
Income tax provision	6,424			24,282			38,123			65,631
Net income before allocation to non-controlling interests	94,441			54,693			201,265			146,224
Net income attributable to non-controlling interests — joint ventures	(159		)	(427		)	(428		)	(625		)
Net income before non-controlling interests	94,282			54,266			200,837			145,599
Net income attributable to non-controlling interests	(714		)	(21,390		)	(4,391		)	(76,810		)
Net income available to Taylor Morrison Home Corporation	$	93,568		$	32,876		$	196,446		$	68,789
Earnings per common share
Basic	$	0.84		$	0.45		$	1.75		$	1.21
Diluted	$	0.83		$	0.45		$	1.73		$	1.21
Weighted average number of shares of common stock:
Basic	111,396			72,471			112,449			56,791
Diluted	113,440			121,183			116,378			120,991

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

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TAYLOR MORRISON HOME CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Income before non-controlling interests, net of tax	$	94,441		$	54,693		$	201,265		$	146,224
Comprehensive income attributable to non-controlling interests — joint ventures	(159		)	(427		)	(428		)	(625		)
Comprehensive income attributable to non-controlling interests	(714		)	(21,390		)	(4,391		)	(76,810		)
Comprehensive income available to Taylor Morrison Home Corporation	$	93,568		$	32,876		$	196,446		$	68,789

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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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⁽²⁾			Amount			Amount				Shares		Amount				Retained Earnings			Accumulated Other Comprehensive Loss				Non-controlling Interest - Joint Venture			Non-controlling Interests⁽¹⁾				Total Stockholders’ Equity
Balance – December 31, 2017	82,399,996		$	1		37,179,616			$	—		$	1,341,873			3,049,257		$	(47,622	)		$	319,833		$	(17,968	)		$	1,663		$	748,765			$	2,346,545
Cumulative-effect adjustment to Retained Earnings, net of tax related to adoption of ASU No. 2014-09 (see Note 2)																						1,501														1,501
Net income	—		—			—			—			—				—		—				196,446			—				428			4,391				201,265
Exchange of New TMM Units and corresponding number of Class B Common Stock	20,487		—			(20,487	)		—			1,293				—		—				—			—				—			(1,293		)		—
TMHC repurchase and cancellation of New TMM Units from Former Principal Equityholders	—		—			(7,588,771	)		—			(201,775		)		—		—				—			—				—			—				(201,775		)
Exercise of stock options	118,992		—			—			—			1,887				—		—				—			—				—			—				1,887
Issuance of restricted stock units, net of shares withheld for tax	162,532	—	—		—	—		—	—		—	(1,498		)	—	—	—	—			—	—		—	—			—	—		—	—			—	(1,498		)
Exchange of B shares from public offerings	28,706,924		—			—			—			729,954				—		—				—			—				—			—				729,954
Repurchase of New TMM Units from Former Principal Equityholders	—		—			(28,706,924	)		—			—				—		—				—			—				—			(730,963		)		(730,963		)
Share based compensation	—		—			—			—			9,539				—		—				—			—				—			342				9,881
Changes in non-controlling interests of consolidated joint ventures	—		—			—			—			—				—		—				—			—				2,413			—				2,413
Balance – September 30, 2018	111,408,931		$	1		863,434			$	—		$	1,881,273			3,049,257		$	(47,622	)		$	517,780		$	(17,968	)		$	4,504		$	21,242			$	2,359,210

⁽¹⁾As of September 30, 2018, the remaining Non-controlling Interest relates to management and director ownership. Refer to Note 10 - Stockholders' Equity for discussion regarding our equity offering transactions during the nine months ended September 30, 2018.

⁽²⁾Refer to Note 17 - Subsequent Events for discussion regarding retirement of Class B Common Stock on October 26, 2018.

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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TAYLOR MORRISON HOME CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)



	Nine Months Ended September 30,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income before allocation to non-controlling interests	$	201,265		$	146,224
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in income of unconsolidated entities	(9,777		)	(6,943		)
Stock compensation expense	9,881			10,227
Distributions of earnings from unconsolidated entities	4,168			4,666
Depreciation and amortization	17,606			2,994
Debt issuance costs amortization	2,442			2,864
Contingent consideration	146			766
Deferred income taxes	12,782			(9,032		)
Changes in operating assets and liabilities:
Real estate inventory and land deposits	(296,678		)	(243,343		)
Mortgages held for sale, prepaid expenses and other assets	81,769			141,813
Customer deposits	56,587			74,031
Accounts payable, accrued expenses and other liabilities	(19,670		)	4,017
Income taxes payable	(4,525		)	4,491
Net cash provided by operating activities	55,996			132,775
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(14,454		)	(1,843		)
Distributions of capital from unconsolidated entities	22,271			4,223
Investments of capital into unconsolidated entities	(3,547		)	(28,854		)
Net cash provided by (used in) investing activities	4,270			(26,474		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in loans payable and other borrowings	27,158			8,644
Repayments of loans payable and other borrowings	(14,942		)	(11,305		)
Borrowings on mortgage warehouse	552,908			567,922
Repayment on mortgage warehouse	(617,273		)	(705,194		)
Payment of contingent consideration	(265		)	—
Proceeds from stock option exercises	1,887			4,791
Proceeds from issuance of shares from public offerings	767,116			882,306
TMHC repurchase and cancellation of New TMM Units from Former Principal Equityholders	(201,775		)	—
Repurchase of shares from Former Principal Equityholders	(768,125		)	(884,403		)
Repurchase of common stock, net	—			(4,098		)
Payment of taxes related to net share settlement of equity awards	(1,498		)	(307		)
Contributions to (Distributions to) non-controlling interests of consolidated joint ventures, net	2,413			(292		)
Net cash (used in) financing activities	(252,396		)	(141,936		)
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS	$	(192,130	)	$	(35,635	)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period	575,503			301,812
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — End of period	$	383,373		$	266,177
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid, net	$	(44,569	)	$	(70,172	)
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Change in loans payable issued to sellers in connection with land purchase contracts	$	53,099		$	55,151
Change in inventory not owned	$	11,284		$	(3,145	)
Change in Prepaid expenses and other assets, net due to adoption of ASU 2014-09	$	(32,004	)	$	—
Change in Property and equipment, net due to adoption of ASU 2014-09	$	32,004		$	—

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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TAYLOR MORRISON HOME CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS

Organization and Description of the Business — Taylor Morrison Home Corporation “TMHC” through its subsidiaries (with TMHC referred to herein as “we,” “our,” “the Company” and “us”), owns and operates a residential homebuilding business and is a developer of lifestyle communities. As of September 30, 2018, we operated in the states of Arizona, California, Colorado, Florida, Georgia, Illinois, North and South Carolina, and Texas. Our Company serves a wide array of consumer groups from coast to coast, including first time, move-up, luxury, and active adult. Our homebuilding company operates under our Taylor Morrison and Darling Homes brand names. Our business is organized into multiple homebuilding operating components, and a financial services component (formerly called our mortgage operating component), all of which are managed as four reportable segments: East, Central, West, and Financial Services. 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 Financial Services reportable segment provides our customers with mortgage services 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”).

As a result of the completion of our initial public offering (“IPO”) on April 12, 2013 and a series of transactions pursuant to a Reorganization Agreement dated as of April 9, 2013, TMHC was formed and became the owner and general partner of TMM Holdings II Limited Partnership (“New TMM”), our direct subsidiary. New TMM was formed 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”), and affiliates of JH Investments, Inc. (“JH” and together with the TPG Entities and Oaktree Entities, the “Former Principal Equityholders”).

From January 2017 through January 2018, we completed seven public offerings for an aggregate of 80.2 million shares of our Class A Common Stock, using all of the net proceeds therefrom to repurchase our Former Principal Equityholders' indirect interest in TMHC. In January 2018, we also purchased an additional 7.6 million shares of our Class B Common Stock from TPG and Oaktree. All equity interests in TMHC owned by JH were sold as of February 2017 and all equity interests in TMHC owned by TPG and Oaktree were sold as of February 2018. Refer to Note 10. Stockholders' Equity for discussion regarding our equity offering transactions.

On June 7, 2018 we entered into an Agreement and Plan of Merger with AV Homes, Inc. (“AV Homes”). AV Homes is a homebuilder and land developer of residential communities in Florida, North Carolina, South Carolina, Arizona and Texas. AV Homes focuses on the development and construction of primary residential communities that serve first-time and move-up buyers, as well as age restricted active adult communities.

On October 2, 2018, we completed the acquisition of AV Homes (the “Acquisition”). At the closing of the merger, we paid approximately $280.4 million in cash and issued 8.95 million shares of our Class A common stock to stockholders of AV Homes as merger consideration. In addition, at closing we assumed $80 million aggregate principal amount of AV Homes’ 6.00% Convertible Senior Notes due 2020 (the “Convertible Notes”), all of which had been converted as of October 25, 2018 for approximately $95.8 million in cash, resulting in total purchase consideration for the Acquisition of approximately $535 million. In connection with the Acquisition, one of our subsidiaries also assumed $400 million aggregate principal amount of AV Homes’ 6.625% Senior Notes due 2022 (the “2022 Senior Notes”).

Within 12 months after the completion of the merger, final valuations of the assets acquired and liabilities assumed will be completed. Refer to Note 17. Subsequent Events for additional information.

On October 26, 2018, we completed a holding company reorganization pursuant to which Taylor Morrison Home Corporation (formerly known as Taylor Morrison Homes Corporation), which was incorporated as a Delaware corporation in September 2018 (“New Taylor Morrison”), became the successor to Taylor Morrison Home II Corporation, a Delaware corporation formerly known as Taylor Morrison Home Corporation (“Original Taylor Morrison”). New Taylor Morrison assumed the name Taylor Morrison Home Corporation, the former publicly-traded company and now a wholly owned subsidiary of New Taylor Morrison (“Original Taylor Morrison”). Refer to Note 17. Subsequent Events for additional information.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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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 Annual Report on Form 10-K for 2017 (the “Annual Report”). 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.

Non-controlling interests – During the first quarter of 2018, we completed sales of our Class A Common Stock in registered public offerings, totaling 28.7 million shares. We used all of the net proceeds from the public offerings to purchase partnership units in New TMM (“New TMM Units”) along with shares of our Class B Common Stock, held by TPG and Oaktree. Separately, in a series of transactions following each public offering, the Company purchased an additional 3.8 million shares of Class B common stock directly from TPG and Oaktree on both January 8, 2018 and January 17, 2018, for an aggregate total of 7.6 million shares purchased. As a result, we adjusted Non-controlling interests and Additional paid-in capital on the Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Stockholders' Equity to reflect the change in ownership. Refer to Note 10- Stockholders' Equity for discussion regarding our equity offering transactions.

Joint Ventures - We consolidate certain joint ventures in accordance with Accounting Standards Codification (“ASC”) Topic 810, “Consolidation.” The income from the percentage of the joint venture not owned by us in presented as “Net income attributable to non-controlling interests - joint ventures” on the Condensed Consolidated Statements of Operations.

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.

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

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

We assess the recoverability of our 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 date. 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 nine months ended September 30, 2018 and 2017, no impairment charges were recorded.

In certain cases, we may elect to cease development and/or marketing of an existing community if we believe the economic performance of the community would be maximized by deferring development for a period of time to allow for market conditions to improve. The decision may be based on financial and/or operational metrics as determined by us. If we decide to cease developing a project, we will evaluate the project for impairment and then cease future development and marketing activity until such a time when we believe that market conditions have improved and economic performance can be maximized. Our assessment of the carrying value of our assets typically includes subjective estimates of future performance, including the

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timing of when development will recommence, the type of product to be offered, and the margin to be realized. In the future, some of these inactive communities may be re-opened while others may be sold. As of September 30, 2018 we had no inactive projects. As of December 31, 2017 we had two inactive projects with a carrying value of $10.7 million in the West homebuilding segment. There were no inactive projects in our Central or East homebuilding segments as of December 31, 2017.

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

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 nine months ended September 30, 2018 or 2017.

Revenue Recognition

Topic 606

In January 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09” or “Topic 606”), which provides new guidance for revenue recognition and elected to use the modified retrospective approach to account for prior periods. The standard's core principle requires an entity to 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. The new guidance does not materially impact our home closings revenue, net, land closings revenue or financial services revenue based on our current operations, customer contracts, and policies. However, the following changes were made to conform to the new guidance:

•

Forfeited customer deposits were previously classified as a credit to Other expense/(income), net on the Condensed Consolidated Statement of Operations. Under Topic 606, these are now considered revenue and recorded in Home closings revenue, net as of January 1, 2018. Prior period balances for forfeited customer deposits were not reclassified and are not material to the Condensed Consolidated Financial Statements.

•

Certain costs related to sales offices and model homes were previously capitalized and presented within Prepaid expenses and other assets, net on the Condensed Consolidated Balance Sheet and amortized through Sales, commissions and other marketing costs on the Condensed Consolidated Statement of Operations. Beginning January 1, 2018, these costs have been reclassified to Property and equipment, net on the Condensed Consolidated Balance Sheet and depreciated through Sales, commissions and other marketing costs on the Condensed Consolidated Statement of Operations. A total of $32.0 million of sales office and model homes costs were reclassified from Prepaid expenses and other assets, net to Property and equipment, net as of January 1, 2018. As we elected the modified retrospective approach to account for prior periods, the balance of any capitalized sales office and model home costs required to be expensed under Topic 606 was recorded as an adjustment to beginning retained earnings in 2018 and reflected as an approximate $1.5 million cumulative effect adjustment to retained earnings in the Condensed Consolidated Statement of Stockholders' Equity.

Home and land closings revenue

Under Topic 606, the following steps are applied to determine the proper home closings revenue and land closings revenue recognition: (1) we identify the contract(s) with our customer; (2) we identify the performance obligations in the contract; (3) we determine the transaction price; (4) we allocate the transaction price to the performance obligations in the contract; and (5) we recognize revenue when (or as) we satisfy the performance obligation. For our home sales transactions, we have one contract, with one performance obligation, with each customer to build and deliver the home purchased (or develop and deliver land). Based on the application of the five steps, the following summarizes the timing and manner of home and land sales revenue:

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•	Revenue from closings of residential real estate is recognized when closings have occurred, the buyer has made the required minimum down payment, obtained necessary financing, the risks and rewards of ownership are transferred to the buyer, and we have no continuing involvement with the property, which is generally upon the close of escrow. Revenue is reported net of any discounts and incentives.


•	Revenue from land sales is recognized when a significant down payment is received, title passes and collectability of the receivable is reasonably assured, and we have no continuing involvement with the property, which is generally upon the close of escrow.

Financial services revenue

Mortgage operations and hedging activity related to financial services are not within the scope of Topic 606 and therefore there was no change to our accounting policies related to such activities. Loan origination fees (including title fees, points, and 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 financial services revenue/expenses is the realized and unrealized gains and losses from hedging instruments.

Recently Issued Accounting Pronouncements — In February 2016, the Financial Accounting Standards Board (“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. The guidance requires a modified retrospective approach for all existing leases at the date of initial adoption. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases. ASU 2018-10 primarily provides additional guidance to Topic 842 including clarification on residual value guarantees, implicit rates, lessee reassessment of lease classifications, and other various areas within the Topic. We do not believe the adoption of ASU 2016-02 or ASU 2018-10 will have a material impact on our Condensed Consolidated Financial Statements and 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 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 dilutive 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 September 30,				Nine months ended September 30,
	2018		2017		2018		2017
Numerator:
Net income available to TMHC – basic	$	93,568	$	32,876	$	196,446	$	68,789
Net income attributable to non-controlling interest	714		21,390		4,391		76,810
Loss fully attributable to public holding company	100		136		349		288
Net income – diluted	$	94,382	$	54,402	$	201,186	$	145,887
Denominator:
Weighted average shares – basic (Class A)	111,396		72,471		112,449		56,791
Weighted average shares – non-controlling interest (Class B)	863		47,253		2,508		62,842
Restricted stock units	904		1,121		1,043		1,026
Stock Options	277		338		378		332
Weighted average shares – diluted	113,440		121,183		116,378		120,991
Earnings per common share – basic:
Net income available to Taylor Morrison Home Corporation	$	0.84	$	0.45	$	1.75	$	1.21
Earnings per common share – diluted:
Net income available to Taylor Morrison Home Corporation	$	0.83	$	0.45	$	1.73	$	1.21

We excluded a total weighted average of 2,562,840 and 1,685,938 outstanding anti-dilutive stock options and unvested restricted stock units (“RSUs”) and 1,442,767 and 1,926,836 stock options and unvested RSUs from the calculation of earnings per share for the three and nine months ended September 30, 2018 and 2017, 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. Refer to Note 17. Subsequent Events for discussion regarding our holding company reorganization and the retirement of Class B Common Stock on October 26, 2018.

4. REAL ESTATE INVENTORY AND LAND DEPOSITS

Inventory consists of the following (in thousands):



	As of
	September 30, 2018		December 31, 2017
Real estate developed and under development	$	2,194,880	$	2,130,263
Real estate held for development or held for sale⁽¹⁾	65,971		76,552
Operating communities ⁽²⁾	899,937		659,398
Capitalized interest	94,512		90,496
Total owned inventory	3,255,300		2,956,709
Real estate not owned	13,811		2,527
Total real estate inventory	$	3,269,111	$	2,959,236

⁽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, properties where we have ceased development and/or marketing, 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
	September 30, 2018			December 31, 2017
	Owned Lots	Book Value of Land and Development		Owned Lots	Book Value of Land and Development
Raw	7,362	$	286,753	7,703	$	338,642
Partially developed	7,639	473,725		5,811	543,200
Finished	12,982	1,500,373		11,644	1,314,243
Long-term strategic assets	—	—		763	10,730
Total	27,983	$	2,260,851	25,921	$	2,206,815

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, 2018 and December 31, 2017, we had the right to purchase 4,715 and 5,037 lots under land option purchase contracts, respectively, for an aggregate purchase price of $395.8 million and $405.3 million, respectively. We do not have title to the properties, and the creditors generally have no recourse against the Company. As of September 30, 2018 and December 31, 2017, our exposure to loss related to our option contracts with third parties and unconsolidated entities consisted of non-refundable deposits totaling $47.9 million and $49.8 million, respectively.

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Interest capitalized - beginning of period	$	95,693		$	100,490		$	90,496		$	102,642
Interest incurred	20,164			20,762			59,979			62,187
Interest amortized to cost of home closings	(21,345		)	(21,789		)	(55,963		)	(65,366		)
Interest capitalized - end of period	$	94,512		$	99,463		$	94,512		$	99,463

5. 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/or 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
	September 30, 2018		December 31, 2017
Assets:
Real estate inventory	$	558,871	$	627,841
Other assets	120,185		138,341
Total assets	$	679,056	$	766,182
Liabilities and owners’ equity:
Debt	$	173,932	$	193,770
Other liabilities	16,431		27,556
Total liabilities	190,363		221,326
Owners’ equity:
TMHC	179,249		192,364
Others	309,444		352,492
Total owners’ equity	488,693		544,856
Total liabilities and owners’ equity	$	679,056	$	766,182



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenues	$	95,085		$	60,020		$	264,624		$	147,273
Costs and expenses	(84,409		)	(47,505		)	(227,061		)	(118,546		)
Income of unconsolidated entities	$	10,676		$	12,515		$	37,563		$	28,727
TMHC’s share in income of unconsolidated entities	$	2,514		$	2,787		$	9,777		$	6,943
Distributions from unconsolidated entities	$	13,176		$	2,098		$	26,439		$	8,889

6. ACCRUED EXPENSES AND OTHER LIABILITIES

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



	As of September 30, 2018		As of December 31, 2017
Real estate development costs to complete	$	10,428	$	14,815
Compensation and employee benefits	56,912		72,352
Self-insurance and warranty reserves	53,408		51,010
Interest payable	24,516		17,125
Property and sales taxes payable	17,144		12,294
Other accruals	26,273		33,944
Total accrued expenses and other liabilities	$	188,681	$	201,540

Self-Insurance and Warranty Reserves – We accrue for the expected costs associated with our limited 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 September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Reserve - beginning of period	$	53,011		$	54,084		$	51,010		$	50,550
Additions to reserves	9,438			6,403			24,763			17,446
Costs and claims incurred	(9,592		)	(8,203		)	(22,525		)	(18,131		)
Change in estimates to existing reserves	551			(748		)	160			1,671
Reserve - end of period	$	53,408		$	51,536		$	53,408		$	51,536

7. DEBT

Total debt consists of the following (in thousands):



	As of
	September 30, 2018						December 31, 2017
	Principal		Unamortized Debt Issuance Costs		Carrying Value		Principal		Unamortized Debt Issuance Costs		Carrying Value
5.25% Senior Notes due 2021, unsecured	$	550,000	$	2,994	$	547,006	$	550,000	$	3,892	$	546,108
5.875% Senior Notes due 2023, unsecured	350,000		2,576		347,424		350,000		3,002		346,998
5.625% Senior Notes due 2024, unsecured	350,000		2,916		347,084		350,000		3,319		346,681
Senior Notes subtotal	1,250,000		8,486		1,241,514		1,250,000		10,213		1,239,787
Loans payable and other borrowings	160,173		—		160,173		139,453		—		139,453
Revolving Credit Facility⁽¹⁾	—		—		—		—		—		—
Mortgage warehouse borrowings	54,457		—		54,457		118,822		—		118,822
Total Senior Notes and other financing	$	1,464,630	$	8,486	$	1,456,144	$	1,508,275	$	10,213	$	1,498,062

⁽¹⁾The Revolving Credit Facility included $2.9 million and $2.0 million of unamortized debt issuance costs as of September 30, 2018 and December 31, 2017, respectively, which is presented in Prepaid expenses and other assets, net on the Consolidated Balance Sheets. As of September 30, 2018 and December 31, 2017, we had $53.7 million and $47.1 million, respectively, of utilized letters of credit, resulting in $546.3 million and $452.9 million, respectively, of availability under the Revolving Credit Facility.

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 Limited Partnership (“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

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 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 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

On January 26, 2018, we amended our $500.0 million Revolving Credit Facility to extend the maturity date from April 12, 2019 to January 26, 2022. On June 29, 2018, we further amended the Revolving Credit Facility to increase the amount available to $600.0 million. Other immaterial changes were also made to the structure of the Revolving Credit Facility. 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 $1.7 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 September 30, 2018, we were in compliance with all of the covenants under the Revolving Credit Facility.

Refer to Note 17- Subsequent Events for discussion relating to our $200.0 million 364-Day Credit Agreement which was entered into on October 2, 2018 in connection with the Acquisition and our assumption of $400 million aggregate principal amount of 2022 Senior Notes and $80 million aggregate principal amount of Convertible Notes.

Mortgage Warehouse Borrowings

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

As of September 30, 2018

Facility

Amount Drawn

Facility Amount

Interest Rate

Expiration Date

Collateral ⁽¹⁾

Warehouse A

1,129

45,000

⁽²⁾

LIBOR + 1.75%

On Demand

Mortgage Loans

Warehouse B

16,857

50,000

LIBOR + 2.25%

On Demand

Mortgage Loans

Warehouse C

36,471

100,000

LIBOR + 2.375%

On Demand

Mortgage Loans and Restricted Cash

Total

54,457

195,000

As of December 31, 2017

Facility

Amount Drawn

Facility Amount

Interest Rate

Expiration Date

Collateral ⁽¹⁾

Warehouse A

12,990

39,000

⁽²⁾

LIBOR + 2.25%

30 days written notice

Mortgage Loans

Warehouse B

41,447

85,000

LIBOR + 2.25%

On Demand

Mortgage Loans

Warehouse C

64,385

125,000

LIBOR + 2.375%

September 24, 2018

Mortgage Loans and Restricted Cash

Total

118,822

249,000

⁽¹⁾ The mortgage warehouse borrowings outstanding as of September 30, 2018 and December 31, 2017 were collateralized by a) $83.8 million and $187.0 million, respectively, of mortgage loans held for sale, which comprised the balance of mortgage loans held for sale and b) approximately $1.3 million and $1.6 million, respectively, of cash which are included in restricted cash in the accompanying Condensed Consolidated Balance Sheets.

⁽²⁾From time to time we have the ability to amend this warehouse agreement to increase or decrease capacity to accommodate funding needs.

Loans Payable and Other Borrowings

Loans payable and other borrowings as of September 30, 2018 and December 31, 2017 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 each of September 30, 2018 and December 31, 2017. We impute interest for loans with no stated interest rates.

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8. 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 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 September 30, 2018, when compared to December 31, 2017.

The carrying value and fair value of our financial instruments are as follows:



		September 30, 2018				December 31, 2017
(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	$	83,751	$	83,751	$	187,038	$	187,038
Derivative assets, net	2	2,329		2,329		1,352		1,352
Mortgage warehouse borrowings	2	54,457		54,457		118,822		118,822
Loans payable and other borrowings	2	160,173		160,173		139,453		139,453
5.25% Senior Notes due 2021 ⁽¹⁾	2	547,006		552,090		546,108		561,000
5.875% Senior Notes due 2023 ⁽¹⁾	2	347,424		352,625		346,998		369,705
5.625% Senior Notes due 2024 ⁽¹⁾	2	347,084		344,750		346,681		366,205
Revolving Credit Facility	2	—		—		—		—
Contingent consideration liability⁽²⁾	3	—		—		5,328		5,328

⁽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.

⁽²⁾ All payments related to our contingent consideration liability were paid during the first quarter of 2018 and no liability exists as of September 30, 2018.

9. INCOME TAXES

Our effective tax rate for the three and nine months ended September 30, 2018 was 6.4% and 15.9%, respectively, compared to 30.7% and 31.0% for the same periods in 2017, respectively. For the three and nine months ended September 30, 2018 and 2017, 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.

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The effective tax rate for the three and nine months ended September 30, 2018 was favorably impacted by the reduction in the federal corporate tax rate from 35% to 21% as a result of the Tax Cuts and Jobs Act (“Tax Act”), the relevant provisions of which became effective on January 1, 2018. In response to the Tax Act, we filed three requests for a change in tax accounting methods related to the timing of income and expense recognition for tax purposes. One of our requests was for a tax accounting method afforded automatic consent while the other two required advanced consent from the Internal Revenue Service (“IRS”). We received affirmative consent from the IRS and signed an agreement for one of the requests during the quarter ended September 30, 2018. The impact of the approved tax accounting method changes was reflected in our consolidated financial statements as of September 30, 2018 as a reduction in income tax expense of $8.1 million. Subsequent to the quarter ended September 30, 2018, we received affirmative consent from the IRS and signed an agreement for the second request for change in method of tax accounting, the effects of which will be recognized in our annual consolidated financial statements for the year ending December 31, 2018. Refer to Note 17. Subsequent Events for additional information.

In accordance with Staff Accounting Bulletin No. 118 (“SAB 118”), the Company recorded provisional tax expense in the fourth quarter of 2017 related to the write-down of our existing deferred tax assets and the mandatory deemed repatriation of foreign earnings related to the sale of our Canadian business in 2015. In the quarter ended September 30, 2018, we recorded a $0.5 million reduction to the provisional tax expense for the mandatory deemed repatriation of foreign earnings. The adjustment to the provisional tax expense during the quarter resulted from completing our calculations of the transition tax and finalizing our U.S. federal income tax returns. Our accounting for the transition tax is complete. We expect our final accounting related to the remeasurement of our existing deferred tax assets under SAB 118 to be complete when we file our U.S. federal tax returns during the fourth quarter of 2018.

Our cumulative gross unrecognized tax benefits were $3.6 million and $12.9 million as of September 30, 2018 and December 31, 2017, respectively. The reduction to our cumulative gross unrecognized tax benefits during the quarter ended September 30, 2018 was the result of the completion of a state audit related to the utilization of the Company’s state net operating losses.

If the unrecognized tax benefits as of September 30, 2018 were to be recognized, approximately $2.9 million would affect the effective tax rate. We had $0.7 million and $1.0 million of gross interest and penalties related to unrecognized tax positions accrued as of September 30, 2018 and December 31, 2017, respectively. The reduction to our gross accrued interest and penalties during the quarter ended September 30, 2018 was the result of the conclusion of a state audit.

10. 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 nine months ended September 30, 2018, we completed 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 TPG and Oaktree. As a result, we adjusted Non-controlling interests 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 by the Company in the public offerings.

The following is a summary of the completed sales of our Class A Common Stock in registered public offerings for the nine months ended September 30, 2018:

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⁽¹⁾ The January 17, 2018 offering consisted of 17.7 million shares of Class A common stock offered by the Company and 1.5 million shares offered directly by TPG.

In addition, in a series of transactions following each public offering, the Company purchased 3.8 million shares of Class B common stock directly from TPG and Oaktree on both January 8, 2018 and January 17, 2018 at the same respective net purchase price per share in each public offering, for an aggregate total of 7.6 million shares purchased.

Following our public offering on January 17, 2018, our Former Principal Equityholders no longer have any remaining investment in us. The components and respective voting power of outstanding TMHC Common Stock, at September 30, 2018 are as follows:



	Shares Outstanding	Percentage
Class A Common Stock	111,408,931	99.2	%
Class B Common Stock⁽¹⁾	863,434	0.8	%
Total	112,272,365	100	%

⁽¹⁾ The remaining 0.8% of Class B Common Stock is held by certain current and former members of management and directors.

On October 26, 2018, we completed a holding company reorganization, which resulted in a new parent company (“New Taylor Morrison”) owning all of the outstanding common stock of Taylor Morrison Home II Corporation (formerly known as Taylor Morrison Home Corporation) (“Original Taylor Morrison”). New Taylor Morrison assumed the name Taylor Morrison Home Corporation. Consequently, Original Taylor Morrison became a direct, wholly-owned subsidiary of New Taylor Morrison. In the holding company reorganization, Original Taylor Morrison’s stockholders became stockholders of New Taylor Morrison, on a one-for-one basis, with the same number of shares and same ownership percentage of the corresponding class of Original Taylor Morrison common stock that they held immediately prior to the holding company reorganization.

Additionally, on October 26, 2018 all of the outstanding shares of New Taylor Morrison Class B common stock, par value $0.00001, were retired following an exchange of such shares and the corresponding New TMM Units for an equal number of shares of New Taylor Morrison Class A common stock, par value $0.00001. Therefore, following this transaction, only one class of New Taylor Morrison's common stock remains outstanding. Refer to Note 17- Subsequent Events for additional discussion.

Stock Repurchase Program

On January 3, 2018, our Board of Directors authorized an extension of the Company's stock repurchase program through December 31, 2018 and increased the amount available for repurchases under the program to a maximum total amount of $200.0 million of the Company’s Common Stock 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 debt instruments, statutory requirements, planned land investment and development spending, acquisition and other investment opportunities and ongoing capital requirements. On January 8, 2018 we purchased $100.0 million of Common Stock. On January 17, 2018 we purchased an additional $101.8 million of Common Stock. Because these repurchases were in connection with the offerings by TPG and Oaktree, the stock repurchase program was not reduced by such purchase and such authorization remained in effect thereafter. As of September 30, 2018 there was $95.9 million available to be used for repurchases. During the three months ended September 30, 2018, we did not repurchase any shares. During the three and nine months ended September 30, 2017, we repurchased 195,824 shares for $4.1 million. Subsequent to September 30, 2018 we repurchased approximately 3.0 million shares for $48.7 million.

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11. 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 September 30, 2018, we had an aggregate of 8,336,911 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 September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Restricted stock units ⁽¹⁾	$	2,673	$	2,157	$	6,778	$	6,348
Stock options	918		1,162		3,103		3,308
New TMM units ⁽²⁾	—		58		—		571
Total stock compensation	$	3,591	$	3,377	$	9,881	$	10,227

⁽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.

⁽²⁾As of December 31, 2017, all new TMM units were vested, and there is no further expense associated with them.

At September 30, 2018 and December 31, 2017, the aggregate unrecognized value of all outstanding stock-based compensation awards was approximately $24.2 million and $19.8 million, respectively.

Restricted Stock Units – The following table summarizes the time-based RSU and performance-based RSU activity for the nine months ended September 30, 2018:



	Shares		Weighted Average Grant Date Fair Value
Balance at December 31, 2017	1,889,559		$	14.84
Granted	574,285		24.06
Vested	(225,106	)	15.31
Forfeited ⁽¹⁾	(367,860	)	16.59
Balance at September 30, 2018	1,870,878		$	17.10

⁽¹⁾Forfeitures on time-based RSUs are a result of termination of employment, while forfeitures on performance-based RSUs are a result of failing to attain certain goals as outlined in our stock based compensation awards or termination of employment.

During the three and nine months ended September 30, 2018, we granted 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 vest ratably over a three to four year period, based on the grant date. Time-based RSUs granted to members of the Board of Directors generally vest on the first anniversary of the grant date.

Additionally, we granted 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-based RSUs to the award recipients may be greater or less 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 nine months ended September 30, 2018:

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	Shares		Weighted Average Exercise Price Per Share
Outstanding at December 31, 2017	2,854,213		$	17.50
Granted	721,762		23.86
Exercised	(118,992	)	15.85
Canceled/Forfeited	(199,742	)	18.60
Outstanding at September 30, 2018	3,257,241		$	18.88
Options exercisable at September 30, 2018	1,535,093		$	18.80

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 vest and become 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 in connection with our 2013 IPO, 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. As of December 31, 2017, all New TMM Units were vested. The shares of Class B Common Stock/New TMM Units held by members of management and members of our Board of Directors as of September 30, 2018 were as follows:



	Class B Shares/New TMM Units		Weighted Average Grant Date Fair Value
Balance at December 31, 2017	883,921		$	5.24
Exchanges ⁽¹⁾	(20,487	)	6.93
Balance at September 30, 2018	863,434		$	5.20

⁽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.

Refer to Note 17. Subsequent Events for discussion regarding our holding company reorganization and the retirement of Class B Common Stock on October 26, 2018.

12. RELATED-PARTY TRANSACTIONS

From time to time, we may engage in transactions with entities or persons that are affiliated with us. 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. There was no activity for the three months ended September 30, 2018.

During the nine months ended September 30, 2018 we purchased New TMM Units and corresponding shares of Class B Common Stock from TPG and Oaktree. Refer to Note 10 - Stockholders' Equity for discussion regarding such transactions.

During the nine months ended September 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.

During the nine months ended September 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 TPG and Oaktree. As a result, we adjusted Non-controlling interests 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 that we purchased

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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 for the nine months ended September 30, 2017:



(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

13. ACCUMULATED OTHER COMPREHENSIVE INCOME

The table below provides the components of accumulated other comprehensive income (loss) (“AOCI”) for the periods presented (in thousands). There was no activity in the three months ended September 30, 2018 or 2017; therefore such periods are not presented.



	Nine Months Ended September 30, 2018
	Total Post- Retirement Benefits Adjustments		Foreign Currency Translation Adjustments				Non-controlling Interest - Former Principal Equityholders Reclassification			Total
Balance, beginning of period	$	2,082	$	(45,205	)		$	25,155		$	(17,968	)
Gross amounts reclassified within AOCI	—		25,155				(25,155		)	—
Balance, end of period	$	2,082	$	(20,050	)	⁽¹⁾	$	—		$	(17,968	)

⁽¹⁾ Refer to Note 17- Subsequent Events for additional discussion regarding corporate reorganization.



	Nine Months Ended September 30, 2017
	Total Post- Retirement Benefits Adjustments		Foreign Currency Translation Adjustments			Non-controlling Interest - Former Principal Equityholders Reclassification			Total
Balance, beginning of period	$	2,061	$	(79,927	)	$	59,877		$	(17,989	)
Gross amounts reclassified within AOCI	—		27,968			(27,968		)	—
Balance, end of period	$	2,061	$	(51,959	)	$	31,909		$	(17,989	)

14. 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 financial services reporting segment. We have no inter-segment sales as all sales are to external customers.

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
Financial Services	Taylor Morrison Home Funding, LLC (“TMHF”) and Inspired Title Services, LLC (“Inspired Title”)

Segment information is as follows (in thousands):



	Three Months Ended September 30, 2018
	East			Central			West			Financial Services		Corporate and Unallocated			Total
Total revenues	$	393,476		$	277,441		$	348,421		$	17,041	$	—		$	1,036,379

Gross margin	70,427			47,715			74,267			6,590		—			198,999
Selling, general and administrative expenses	(32,182		)	(25,612		)	(20,630		)	—		(22,096		)	(100,520		)
Equity in income of unconsolidated entities	137			196			1,309			872		—			2,514
Interest and other (expense)/income, net	(247		)	204			84			—		(169		)	(128		)
Income/(loss) before income taxes	$	38,135		$	22,503		$	55,030		$	7,462	$	(22,265	)	$	100,865



	Three Months Ended September 30, 2017
	East			Central			West			Financial Services		Corporate and Unallocated			Total
Total revenues	$	312,539		$	256,842		$	321,167		$	17,479	$	—		$	908,027

Gross margin	63,188			47,797			54,924			5,409		—			171,318
Selling, general and administrative expenses	(28,469		)	(25,108		)	(19,087		)	—		(22,186		)	(94,850		)
Equity in income of unconsolidated entities	—			693			924			1,170		—			2,787
Interest and other (expense)/income, net	(7		)	(87		)	46			—		(232		)	(280		)
Income/(loss) before income taxes	$	34,712		$	23,295		$	36,807		$	6,579	$	(22,418	)	$	78,975