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TMHC > SEC Filings for TMHC > Form 10-Q on 13-Nov-2013All Recent SEC Filings

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Form 10-Q for TAYLOR MORRISON HOME CORP


13-Nov-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 Taylor Morrison Home Corporation ("TMHC") and its subsidiaries, unless the context otherwise requires. As a result of the Reorganization Transactions and IPO (as defined below), which occurred in April 2013, our results include the results of TMM Holdings Limited Partnership ("TMM Holdings") and its subsidiaries. See Note 14, "Capital Structure" to our unaudited consolidated financial statements included in this report for more information regarding the Reorganization Transactions and the IPO. References to the "Acquisition" in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" refers to the acquisition of all of the outstanding shares of Taylor Woodrow Holdings (USA), Inc. (now known as Taylor Morrison Communities, Inc. or "Taylor Morrison" ) and Monarch Corporation ("Monarch") from Taylor Wimpey plc (the "Predecessor Parent Company") through a combination of equity and debt on July 13, 2011.

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 Exhibit 99.1 hereto which is incorporated by reference in this quarterly report. 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 Exhibit 99.1 hereto, 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%, 28% and 12%, respectively, of our net sales orders (excluding unconsolidated joint ventures) for the quarter ended September 30, 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. The communities in our East and West region offer single family attached and/or detached homes. 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 September 30, 2013, we closed 1,698 homes, comprised of 1,198 homes in the United States and 500 in Canada, including 92 homes in unconsolidated joint ventures, with an average sales price across North America of $381,000. During the same period, we generated $634.4 million in total revenues and $14.3 million in net income available to TMHC. In the United States, for the quarter ended September 30, 2013, our sales orders, including unconsolidated joint ventures, increased approximately 11.9% from 910 homes to 1,018 homes as compared to 2012, and we averaged 2.1 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 September 30, 2013, we offered homes in 178 active selling communities, including four in unconsolidated joint ventures, and had a backlog of 4,416 homes including 732 homes in unconsolidated joint ventures, with an associated backlog sales value of approximately $1.7 billion, including $251.2 million in unconsolidated joint ventures.

In the three months ended September 30, 2012, we closed 943 homes, comprised of 689 units in the United States and 254 homes in Canada, including 65 units in unconsolidated joint ventures, with average sales price of $351,000. During the same period, we generated $321.5 million in total revenues and $42.6 million in net income. As of September 30, 2012, we offered homes in 129 active selling communities, including six in unconsolidated joint ventures, and had a backlog of 4,205 homes sold but not closed, including 903 in unconsolidated joint ventures, with an associated backlog sales value of approximately $1.5 billion, including $317.9 million in unconsolidated joint ventures.


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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 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, borrowings under our Restated Revolving Credit Facility and our existing Canadian credit facilities. See "Recent Developments - Restated Revolving Credit Facility" for further information.

Recent Developments

Initial public offering

On April 12, 2013, 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), which was declared effective by the Securities and Exchange Commission on April 9, 2013 (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 Holdings, 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 Holdings to a new limited partnership, New TMM, such that TMM Holdings and the general partner of TMM Holdings 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 Holdings 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 Holdings surrendered for exchange;

JH exchanged a portion of its Class A Units in TMM Holdings 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 Holdings 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 in TMM Holdings outstanding prior to the Reorganization Transactions; and

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

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 Holdings of TMHC's pre-IPO value to the holders of Class A Units, Class J Units and Class M Units of TMM Holdings, the IPO price and the price per share paid by the Underwriters for shares of Class A Common Stock in the IPO.


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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. One share of Class B Common Stock, together with one New TMM Unit are exchangeable into one share of Class A Common Stock, as provided for in our Exchange Agreement.

In connection with the Reorganization Transactions, TMHC recorded a one-time, non-cash charge of $80.2 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 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 Holdings, Taylor Morrison Holdings, Inc. ("Taylor Morrison Holdings") and Monarch Communities Inc. ("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.

Immediately prior to the IPO, the management services agreements were terminated in exchange for an aggregate payment pursuant to the terms of such agreements of $29.7 million split equally between TPG and Oaktree.

Use of proceeds of the IPO

Net proceeds from the sale of 32,857,800 shares of its Class A Common Stock in the IPO were approximately $668.6 million after deducting underwriting discounts and commissions, and offering expenses.

TMHC used $204.2 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 Holdings, which then contributed such proceeds to the Bond Co-Issuers to redeem $189.6 million aggregate principal amount of 2020 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 April 12, 2013 redemption date). The remaining approximately $464.4 million of the net proceeds from the IPO, together with $18.1 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. A summary of the use of the IPO proceeds follows (In thousands):

                                                                   Use of Proceeds
Proceeds from sale of Class A Common Stock                        $         722,872
Underwriting discounts and commissions                                      (43,372 )
Offering expenses                                                           (10,902 )

Net proceeds                                                      $         668,598
Principal and premium payment on 2020 Senior Notes                         (204,180 )
Purchase of New TMM Units and corresponding shares of Class B
Common Stock                                                               (482,543 )
Cash on hand                                                      $          18,125

                                                                  $              -

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 further 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 Holdings, Credit Suisse AG, as administrative agent, and the other parties thereto.


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The Borrowers had no outstanding borrowings under the Restated Revolving Credit Facility at September 30, 2013 and $50.0 million outstanding at December 31, 2012. As of September 30, 2013, the Borrowers had $376.5 million of additional availability for borrowings and $176.5 million of additional availability for letters of credit (giving effect to $23.5 million of letters of credit outstanding as of such date). For more information regarding the Restated Revolving Credit Facility, see "- Overview of Capital Resources and Liquidity - Restated Revolving Credit Facility".

2021 Senior Notes

On April 16, 2013, the Bond Co-Issuers completed the issuance of $550.0 million aggregate principal amount of Senior Notes due 2021 (the "2021 Senior Notes"). We used the net proceeds from that issuance to repay the outstanding balance under the Restated Revolving Credit Facility and for general corporate purposes, including the purchase of additional land inventory. For more information regarding the 2021 Senior Notes, see "- Overview of Capital Resources and Liquidity - 2021 Senior Notes."

Darling Acquisition

On December 31, 2012, we acquired certain assets and liabilities of Darling Interests, Inc. and certain affiliated entities (collectively "Darling"), a Texas-based homebuilder. Darling builds homes under the Darling Homes brand for move-up and luxury buyers in approximately 22 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.

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 the price for the acquisition was financed by the sellers. In connection with the purchase price allocation for the acquisition, we recorded $21.6 million of goodwill and $9.9 million of intangible assets with finite useful lives. Additionally, we incurred $1.8 million of transaction costs which were recorded as Other (Income) Expense, Net in 2012 in the Consolidated Statement of Operations. 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 Holdings

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

Satisfaction of the time-vesting condition required the JHI Services Agreement to be in effect as of the date each annual installment vests. The service conditions set forth in the JHI 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 Holdings 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 Holdings 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, we determined that no expense for the value of the Class J Units was required to be recorded in our financial statements for any period prior to the occurrence of the Reorganization Transactions.

In the Reorganization Transactions, the TMM Holdings Class J Units tied to TPG's returns were be exchanged for Class J Units of the TPG Holding Vehicle, and the TMM Holdings 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 are part of the equity structure of TMHC or New TMM. The JHI Services Agreement has been terminated and will not be replaced. The termination of the JHI 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 an $80.2 million non-cash charge in our Consolidated Statement of Operations in Indemnification and Transaction Expenses. This non-cash charge is non-recurring and was 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


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comparable peer set of companies, which includes Standard Pacific Corp., 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 Holdings 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 Holdings of TMM Holdings' pre-IPO value to the holders of Class A Units, Class J Units and Class M Units of TMM Holdings based on the price per share paid by the underwriters for shares of TMHC's Class A Common Stock in the IPO 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) had been met as of the date of the IPO.

Results of Operations

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



                                               Three Months Ended                Nine Months Ended
                                                  September 30,                    September 30,
                                              2013            2012             2013             2012
Statements of Operations Data:
Home closings revenue                       $ 622,126       $ 302,899       $ 1,484,928       $ 829,221
Land closings revenue                           4,524          13,452            18,994          36,102
Mortgage operations revenue                     7,791           5,104            20,896          13,705

Total revenues                                634,441         321,455         1,524,818         879,028
Cost of home closings                         489,713         235,517         1,172,748         663,656
Cost of land closings                           6,120           8,918            19,417          27,881
Mortgage operations expenses                    4,385           2,866            11,945           7,667

Gross margin                                  134,223          74,154           320,708         179,824
Sales, commissions and other marketing
costs                                          37,029          19,093            97,238          52,230
General and administrative expenses            21,944          13,252            68,193          41,091
Equity in income of unconsolidated
entities                                       (9,425 )        (3,709 )         (21,049 )       (11,497 )
Interest (income) expense, net                 (1,332 )         1,601            (1,119 )            -
Loss on extinguishment of debt                     -               -             10,141           7,853
Other (income) expense, net                     1,304            (898 )           2,588          (1,655 )
Indemnification and transaction expenses          396             793           188,320          13,063

Income (loss) before income taxes              84,307          44,022           (23,604 )        78,739
Income tax (benefit) provision                 31,675           1,586           (22,287 )        (3,090 )

Income (loss) before noncontrolling
interests, net of tax                          52,632          42,436            (1,317 )        81,829
Income (loss) attributable to
noncontrolling interests - joint
ventures, net of tax                             (471 )          (166 )            (286 )            72

Net income (loss)                              53,103          42,602            (1,031 )        81,757
Income (loss) attributable to
noncontrolling interests - Principal
Equityholders, net of tax                      38,840              -            (20,621 )            -

Net income available to Taylor Morrison
Home Corporation                            $  14,263       $  42,602       $    19,590       $  81,757


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Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Key Results

Key financial results as of and for the three months ended September 30, 2013, as compared to the same period in 2012, were as follows:

Net sales orders increased 4.6% from 1,142 homes (including 15 homes in . . .

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