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TMHC > SEC Filings for TMHC > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for TAYLOR MORRISON HOME CORP


15-May-2013

Quarterly Report


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

For purposes of this "Management's Discussion and Analysis of Financial Condition and Results of Operations," the term "we" and other forms thereof refer to TMM Holdings Limited Partnership and its subsidiaries.

Forward-Looking Statements

This quarterly report includes certain forward-looking statements within the meaning of the federal securities laws regarding, among other things, our or management's intentions, plans, beliefs, expectations or predictions of future events, which are considered forward-looking statements. You should not place undue reliance on those statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These statements often include words such as "may," "will," "should," "believe," "expect," "anticipate," "intend," "plan," "estimate" or similar expressions. These statements are based upon assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. As you read this quarterly report, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions, including those described under the heading "Risk Factors" in our registration statement. Although we believe that these forward-looking statements are based upon reasonable assumptions, you should be aware that many factors, including those described under the heading "Risk Factors" in our registration statement, could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements.

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

Business Overview

We operate under our Taylor Morrison and Darling Homes brands in the United States and under our Monarch brand in Canada. Our business is organized into three geographic regions: East, West and Canada, which regions accounted for 60%, 32% and 8%, respectively, of our net sales orders (excluding unconsolidated joint ventures) for the quarter ended March 31, 2013. Our East region consists of our Houston, Austin, Dallas, North Florida and West Florida divisions. Our West region consists of our Phoenix, Northern California, Southern California and Denver divisions. Our Canada region consists of our operations within the province of Ontario, primarily in the Greater Toronto Area ("GTA") and also in Ottawa and Kitchener-Waterloo, and offers both single-family and high-rise communities.

During the three months ended March 31, 2013, we closed 1,039 homes, comprised of 907 homes in the United States and 132 in Canada, including 27 homes in unconsolidated joint ventures, with an average sales price across North America of $362,000. During the same period, we generated $381.5 million in revenues and $24.3 million in net income. In the United States, for the quarter ended March 31, 2013, our sales orders increased approximately 68.2% as compared to 2012, and we averaged 3.4 sales per active selling community per month compared to an average of 2.8 sales per active selling community per month for the same period in 2012. As of March 31, 2013, we offered homes in 173 active selling communities, including 4 in unconsolidated joint ventures and had a backlog of 4,767 homes including 895 homes in unconsolidated joint ventures, with an associated backlog sales value of approximately $1.7 billion, including $306 million in unconsolidated joint ventures.

In the three months ended March 31, 2012, we closed 660 units, comprised of 462 units in the United States and 198 units in Canada, including 39 units in unconsolidated joint ventures, with average sales price of $353,000. During the same period, we generated $239.4 million in revenues and $10.3 million in net income. As of March 31, 2012, we offered homes in 129.0 active selling communities, including 7.0 in unconsolidated joint ventures and had a backlog of 3,679 homes sold but not closed, including 1,010 in unconsolidated joint ventures, with an associated backlog sales value of approximately $1.2 billion, including $341.3 million in unconsolidated joint ventures.

Liquidity

We rely on our ability to finance our operations by generating operating cash flows, borrowing under our Restated Revolving Credit Facility and our existing Canadian credit facilities or accessing the debt and equity capital markets. We also rely on our independent ability to obtain performance, payment and completion surety bonds, and letters of credit to finance our projects. We believe that we can fund our current and foreseeable liquidity needs from the cash generated from operations and borrowings under our Restated Revolving Credit Facility and our existing Canadian letter of credit facilities. See "Recent Developments - Restated Revolving Credit Facility" for further information.


Table of Contents

The Acquisition and Financing Transactions

On July 13, 2011, TMM Holdings, LP ("TMM") and its subsidiaries acquired 100% of the issued share capital of Taylor Morrison Communities ("TMC") and Monarch Corporation for aggregate cash consideration of approximately $1.2 billion (the "Acquisition"). The Acquisition has been accounted for as a purchase under ASC Topic 805, "Business Combinations." In connection with the Acquisition, we incurred indebtedness, including $625.0 million of borrowings under the Sponsor Loan, $125.0 million of which was repaid through working capital in August 2011 pursuant to our recapitalization plan, $350.0 million of which was refinanced by the offering of the senior notes and $150.0 million of which was contributed or transferred to a subsidiary of TMM.

Recent Developments

Initial public offering

On April 12, 2013, Taylor Morrison Home Corporation ("TMHC") completed its initial public offering (the "IPO") of 32,857,800 shares of its Class A common stock, par value $0.00001 per share (the "Class A Common Stock"), including 4,285,800 shares of Class A common stock sold in connection with the full exercise of the option to purchase additional shares granted to the underwriters, at a price to the public of $22.00 per share. The shares began trading on the New York Stock Exchange on April 10, 2013 under the ticker symbol "TMHC." As a result of the completion of the IPO and the Reorganization Transactions (as defined below), TMHC became the indirect parent of TMM Holdings.

Reorganization Transactions

In connection with the IPO, TMHC completed a series of transactions on April 9, 2013 (the "Reorganization Transactions") pursuant to a Reorganization Agreement dated as of April 9, 2013 (the "Reorganization Agreement") among TMHC, TMM Holdings II Limited Partnership ("New TMM"), other subsidiaries of TMHC, affiliates of TPG Global, LLC ("TPG"), Oaktree Capital Management, L.P. ("Oaktree"), JH Investments Inc. ("JH" and together with TPG and Oaktree, the "Principal Equityholders"), certain members of TMHC's management and its Board of Directors (the "Board"), TPG TMM Holdings II, L.P. (the "TPG Holding Vehicle"), OCM TMM Holdings II, L.P. (the "Oaktree Holding Vehicle" and, together with the TPG Holding Vehicle, the "TPG and Oaktree Holding Vehicles") and TMM Holdings. The Reorganization Agreement governs the terms of the Reorganization Transactions, which are described in TMHC's Registration Statement on Form S-1 (File No. 333-185269) (the "Registration Statement").

Prior to the Reorganization Transactions, as previously reported in the Registration Statement, TMHC amended and restated its Certificate of Incorporation and amended and restated its By-Laws. The amended and restated Certificate of Incorporation was filed with the Delaware Secretary of State on April 9, 2013.

In the Reorganization Transactions, the existing holders of limited partnership interests in TMM, including the Principal Equityholders and certain members of TMHC's management and Board, through a series of transactions, contributed their limited partnership interests in TMM to a new limited partnership, New TMM, such that TMM and the general partner of TMM became wholly-owned subsidiaries of New TMM. TMHC, through a series of transactions, became the sole owner of the general partner of New TMM, and TMHC used a portion of the net cash proceeds received in the IPO to purchase common partnership units in New TMM ("New TMM Units") from New TMM.

In the Reorganization Transactions:

TPG and Oaktree each formed the TPG Holding Vehicle and the Oaktree Holding Vehicle, respectively;

The Principal Equityholders and members of TMHC's management and Board directly or indirectly exchanged all of their respective Class A Units, Class J Units and performance-vesting Class M Units in TMM on a one-for-one basis for new equity interests of the TPG and Oaktree Holding Vehicles with terms that are substantially the same as the Class A Units (other than certain Class A Units exchanged by JH as described below), Class J Units (other than with respect to certain vesting conditions) and performance-vesting Class M Units in TMM surrendered for exchange;

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

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

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

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


Table of Contents

Immediately following the consummation of the Reorganization Transactions, the limited partners of New TMM consisted of TMHC, the TPG Holding Vehicle, the Oaktree Holding Vehicle, JH and certain members of TMHC's management and Board. The number of New TMM Units issued to each of the TPG and Oaktree Holding Vehicles, JH and members of TMHC's management and Board as described above was determined based on a hypothetical cash distribution by TMM of TMHC's pre-IPO value to the holders of Class A Units, Class J Units and Class M Units of TMM, the IPO price and the price per share paid by the Underwriters for shares of Class A Common Stock in the IPO

In connection with the Reorganization Transactions, the TPG and Oaktree Holding Vehicles, JH and members of TMHC's management and Board were also issued a number of shares of TMHC's Class B common stock, par value $0.00001 per share (the "Class B Common Stock") equal to the number of New TMM Units that each received.

At the consummation of the IPO, in connection with the Reorganization Transactions, TMHC estimates that it will record a one-time, non-cash charge that is estimated to be $79.0 million (based on the IPO price of $22.00 and other factors) in respect of the modification of the Class J Units in TMM resulting from the termination of the JHI Partnership Services Agreement between JH and TMM and the direct or indirect exchange (on a one-for-one basis) of the Class J Units for units having substantially equivalent performance vesting and distribution terms in the TPG and Oaktree holding vehicles.

In connection with the Acquisition, affiliates of the Principal Equityholders entered into management services agreements with TMM, Taylor Morrison Holdings and Monarch Communities relating to the provision of certain management, advisory and consulting services. In consideration of financial and structural advice and analysis made in connection with the Acquisition, Taylor Morrison Holdings and Monarch Communities paid a one-time transaction fee of $13.7 million to the Principal Equityholders and also reimbursed the Principal Equityholders for third-party, out-of-pocket expenses incurred in connection with the Acquisition, including fees, expenses and disbursements of lawyers, accountants, consultants and other advisors. In addition, as compensation for ongoing services provided by affiliates of the Principal Equityholders under the management services agreements, Taylor Morrison Holdings and Monarch Communities agreed to pay to affiliates of the Principal Equityholders an annual aggregate management fee of $5.0 million.

In connection with the IPO, the management services agreement with affiliates of TPG and Oaktree was terminated in exchange for an aggregate payment of $28.7 million split equally between TPG and Oaktree.

In connection with the Reorganization Transactions, the TPG and Oaktree Holding Vehicles, JH and members of TMHC's management and Board were also issued a number of shares of the Company's Class B common stock, par value $0.00001 per share (the "Class B Common Stock") equal to the number of New TMM Units that each received. One share of Class B common stock, together with one new TMM Unit are exchangeable into a share of Class A common stock as provided for in our Exchange Agreement.

Use of proceeds of the IPO

Net proceeds from the sale of 32,857,000 shares of its Class A Common Stock in the IPO were approximately $679.5 million after deducting $43.4 million of underwriting discounts and commissions.

TMHC used $204.3 million of the net proceeds of the IPO to acquire New TMM Units from New TMM (at a price equal to the price paid by the underwriters for shares of Class A Common Stock in the IPO). New TMM contributed such net proceeds to TMM's subsidiaries such proceeds to redeem $189.6 million aggregate principal amount of Senior Notes (at a purchase price equal to 103.875% of their principal amount, plus accrued and unpaid interest of $7.3 million through the date of redemption, assuming a redemption date of April 12, 2013). The remaining approximately $475.2 million of the proceeds from the IPO, together with $7.3 million of cash on hand to purchase 23,333,800 New TMM Units (at a price equal to the price paid by the underwriters for shares of TMHC's Class A Common Stock) held by the TPG and Oaktree Holding Vehicles, JH and certain members of TMHC's management. TMHC used cash on hand to pay the estimated $10.0 million of expenses in connection with the IPO.

Restated Revolving Credit Facility

On April 12, 2013, Taylor Morrison and Monarch, each a subsidiary of TMHC (collectively, the "Borrowers"), entered into an amendment agreement (the "Amendment") to the Credit Agreement dated as of July 13, 2011, as amended and restated as of April 13, 2012 and as thereafter amended as of August 15, 2012 and December 27, 2012 (the "Revolving Credit Facility" and as amended by the Amendment, the "Restated Revolving Credit Facility" ), among the Borrowers, TMM, Credit Suisse AG, as administrative agent, and the other parties thereto. The Amendment, among other things, (a) converted the Revolving Credit Facility into an unsecured facility, (b) reduced the Eurodollar applicable margin from 3.25% to 2.00% (subject to a step-up or step-down based on a capitalization ratio) and base rate applicable margin from 2.25% to 1.00% (subject to a step-up or step-down based on a capitalization ratio), (c) increased the aggregate amount of commitments under the Revolving Credit Facility to $400.0 million, of which $200.0 million will be available for letters of credit, (d) permits the Borrowers to increase the Restated Revolving Credit Facility up to an additional $200.0 million through an accordion feature, (e) permits the Borrowers to borrow up to the commitment amount under the Restated Revolving Credit Facility, unless the capitalization ratio as of the most recently ended fiscal quarter exceeds 0.55 to 1.00, in which case, borrowing availability under the Restated Revolving Credit Facility will be measured by reference to a borrowing base formula to be calculated quarterly (or more frequently as the Borrowers may elect) and
(f) extended the maturity date of the facility to April 12, 2017.


Table of Contents

The Restated Revolving Credit Facility contains certain "springing" financial covenants, requiring the Company and its subsidiaries to comply with a certain maximum capitalization ratio and a minimum consolidated tangible net worth test. The financial covenants would be in effect for any fiscal quarter during which any (a) loans under the Restated Revolving Credit Facility are outstanding during the last day of such fiscal quarter or on more than five separate days during such fiscal quarter or (b) undrawn letters of credit (except to the extent cash collateralized) issued under the Restated Revolving Credit Facility in an aggregate amount greater than $40.0 million or unreimbursed letters of credit issued under the Restated Revolving Credit Facility, in each case, are outstanding on the last day of such fiscal quarter or for more than five consecutive days during such fiscal quarter. For purposes of determining compliance with the financial covenants for any fiscal quarter, the Restated Revolving Credit Facility provides that the Company may exercise an equity cure by issuing certain permitted securities for cash or otherwise recording cash contributions to its capital that will, upon the contribution of such cash to Taylor Morrison and/or Monarch, be included in the calculation of consolidated tangible net worth or consolidated total capitalization. The equity cure right is exercisable up to twice in any period of four consecutive fiscal quarters and up to five times overall.

The Restated Revolving Credit Facility contains certain restrictive covenants similar to those currently in place under the Revolving Credit Facility, 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 Restated Revolving Credit Facility contains customary events of default, subject to applicable grace periods, including for nonpayment of principal, interest or other amounts, violation of covenants (including financial covenants, subject to the exercise of an equity cure), incorrectness of representations and warranties in any material respect, cross default and cross acceleration, bankruptcy, material monetary judgments, ERISA events with material adverse effect, actual or asserted invalidity of material guarantees and change of control.

2021 Senior Notes

On April 16, 2013, Taylor Morrison Communities, Inc. and Monarch Communities Inc. (collectively the "Issuers"), wholly-owned subsidiaries of TMHC, completed the issuance of $550.0 million aggregate principal amount of 2021 Senior Notes due 2021 (the "2021 Senior Notes").

The 2021 Senior Notes were issued pursuant to an Indenture (the "Indenture"), dated as of April 16, 2013, by and among the Issuers, the guarantor parties thereto (collectively the "Guarantors") and Wells Fargo Bank, National Association, as trustee, and are unsecured obligations of the Issuers. The Guarantors have issued guarantees (the "Guarantees") of the Issuers' obligations under the Notes and the Indenture on a senior unsecured basis. TMM Holdings is among the Guarantors.

The 2021 Senior Notes will mature on April 15, 2021. Interest on the 2021 Senior Notes will accrue at 5.25% per annum, paid semi-annually, in arrears, on April 15th and October 15th of each year, commencing October 15, 2013. The 2021 Senior Notes and the Guarantees are senior unsecured obligations of the Issuers and the Guarantors. The Indenture contains covenants that, among other things, restrict the Issuers' and Holding's ability and the ability of their restricted subsidiaries to sell assets, pay dividends or make other distributions on capital stock or make payments in respect of subordinated indebtedness, make investments, incur additional indebtedness or issue preferred stock, create certain liens, enter into agreements that restrict dividends or other payments from their restricted subsidiaries to the Issuers, Holdings or their restricted subsidiaries, consolidate, merge or transfer all or substantially all of their assets, engage in transactions with affiliates and create unrestricted subsidiaries.

These covenants are subject to a number of important exceptions and qualifications. The Indenture contains affirmative covenants and events of default that are customary for Indentures governing high-yield debt securities.

The 2021 Senior Notes and Guarantees are not subject to any registration rights agreement.

Darling Acquisition

On December 31, 2012, Taylor Morrison, Inc., through its subsidiary Darling Homes of Texas, LLC, acquired the assets of Darling, a Texas-based homebuilder. Darling builds homes under the Darling Homes brand for move-up buyers in approximately 24 communities in the Dallas-Fort Worth Metroplex and 20 communities in the Greater Houston Area markets. Darling is a well-established builder whose products complement our existing product lines in Texas. We believe the acquisition of Darling has given us a strong presence in the Dallas homebuilding market and will expand our current operations in Houston.


Table of Contents

The consideration for the acquisition of the Darling assets was $114.8 million, which is subject to post-closing adjustment under certain circumstances. A portion of this amount was financed by $50.0 million of borrowings under our Revolving Credit Facility. Approximately $27.6. million of additional consideration for the acquisition was financed by the sellers. In connection with the purchase price allocation for the acquisition, we recorded $14.6 million of goodwill and $16.9 million of intangible assets with finite useful lives, consisting of $1.1 million with respect to a trade name, $13.0 million of lot option contracts and land supplier relationships, $0.2 million of favorable leases and $2.6 million of non-compete covenants. Additionally, we incurred $1.8 million of transaction costs which were recorded as other expense in 2012. Darling operates as part of our East region, consequently the goodwill recorded as part of the Darling acquisition has been recorded in the East region.

Exchange of Class J Units in TMM

In connection with the Acquisition, in July 2011, JH received an aggregate of 60,531,998 Class J Units in TMM (made up of J-1 Units, J-2 Units and J-3 Units). Class J Units were issued in consideration of JH's service to TMM and were subject to both time and performance-based vesting conditions. At the completion of the Acquisition, TMM and JH entered into a Services Agreement (the "JH Service Agreement").

Satisfaction of the time-vesting condition required the JH Services Agreement to be in effect as of the date each annual installment vests. The service conditions set forth in the JH Services Agreement were to lapse after a period of five years.

Class J Units issued in the Acquisition would have satisfied performance-based vesting conditions once TPG and Oaktree had achieved certain specified threshold rates of return on their Class A Units in TMM and those returns were realized in cash. Holders of vested J-1 Units, J-2 Units and J-3 Units would have generally been entitled to participate in TMM distributions once the relevant sponsor, TPG or Oaktree, had realized an internal rate of return (in cash or in kind) on its initial capital contribution of 10%, 15%, or 15% plus a 1.0x, 1.0x or 2.0x return of capital, respectively. Because achievement of the performance-based vesting conditions, meaning the requirement to realize in cash the return on capital of TPG and Oaktree at the applicable thresholds set forth in this paragraph, was not probable over any prior period, the Company determined that no expense for the value of the Class J Units was required to be recorded in its financial statements for any period prior to the occurrence of the Reorganization Transactions.

In the Reorganization Transactions, the TMM Class J Units tied to TPG's returns will be exchanged for Class J Units of the TPG Holding Vehicle, and the TMM Class J Units tied to Oaktree's returns were exchanged for Class J Units of the Oaktree Holding Vehicle, in each case with substantially equivalent performance vesting and distribution terms but no future service conditions. J-1 Units, J-2 Units and J-3 Units of the TPG and Oaktree Holding Vehicles will generally vest when the applicable sponsor, TPG or Oaktree, has achieved an internal rate of return (in cash) on its aggregate capital contribution of 10%, 15%, or 15% plus a 1.0x, 1.0x or 2.0x return of capital, respectively.

As a result of the completion of the Reorganization Transactions and the IPO, no Class J Units will be part of the equity structure of TMHC or New TMM. The JH Services Agreement has been terminated and will not be replaced. The termination of the Services Agreement in connection with the exchange was a modification of the Class J Units under ASC Topic 718-20-35-3, requiring the recognition of a non-cash charge in our statement of operations, which we estimate to be approximately $79.0 million.

The non-cash charge is non-recurring and will be recorded as an expense and as an offset in the noncontrolling interests of TMM Holdings. The amount of the charge represents the fair value of the Class J Units on the date of modification. The fair value of the Class J Units at the date of modification has been estimated using a Black-Scholes model with the following key assumptions: (1) volatility of 40%, based on a comparable peer set of companies, which includes Standard Pacific Group, Lennar Corp, Ryland Group Inc., KB Home, PulteGroup Inc., Hovnanian Enterprises Inc., Beazer Homes USA Inc, Meritage Homes Corporation, M/I Homes Inc., and DR Horton Inc.; (2) a risk free rate of 0.4%, based on US Treasuries with a like term; (3) an expected life of three years; (4) a 20% discount for lack of marketability to account for the illiquidity of the Class J Units in TMM and the Class J Units in the TPG and Oaktree Holding Vehicles being issued in exchange as well as the impact of the performance conditions (the requirement to realize the return on capital of TPG and Oaktree at the applicable thresholds) still to be met as of the date of the modification, based on both quantitative and qualitative factors; and (5) a hypothetical cash distribution by TMM of TMM's pre-IPO value to the holders of Class A Units, Class J Units and Class M Units of TMM based on the price per share paid by the underwriters for shares of TMHC's Class A common stock in the Offering on the assumption that the performance conditions applicable to the Class J Units in TMM (the requirement to realize the return on capital of TPG and Oaktree at the applicable thresholds) have been met as of the date of the IPO.

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