TRI POINTE HOMES, INC., 10-Q filed on 11/13/2014
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2014
Nov. 1, 2014
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2014 
 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q3 
 
Trading Symbol
TPH 
 
Entity Registrant Name
TRI Pointe Homes, Inc. 
 
Entity Central Index Key
0001561680 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Non-accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
161,338,746 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Assets
 
 
Cash and cash equivalents
$ 147,683 
$ 4,510 
Receivables
26,943 
60,397 
Real estate inventories
2,263,740 
1,465,526 
Investments in unconsolidated entities
16,072 
20,923 
Goodwill and other intangible assets, net
151,744 
6,494 
Deferred tax assets
141,601 
288,983 
Other assets
103,613 
63,631 
Total Assets
2,851,396 
1,910,464 
Liabilities
 
 
Accounts payable
62,464 
59,676 
Accrued expenses and other liabilities
201,094 
190,682 
Notes payable and other borrowings
277,128 
 
Senior notes
887,130 
   
Debt payable to Weyerhaeuser
 
834,589 
Total Liabilities
1,427,816 
1,084,947 
Commitments and contingencies (Note 15)
   
   
Stockholders' Equity:
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized; no shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively
   
   
Common stock, $0.01 par value, 500,000,000 shares authorized; 161,338,746 and 129,700,000 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
1,613 
1,297 
Additional paid-in capital
902,771 
333,589 
Retained earnings
504,981 
462,210 
Total Stockholders' Equity
1,409,365 
797,096 
Noncontrolling interests
14,215 
28,421 
Total Equity
1,423,580 
825,517 
Total Liabilities and Equity
$ 2,851,396 
$ 1,910,464 
Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 30, 2014
Dec. 31, 2013
Statement of Financial Position [Abstract]
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
50,000,000 
50,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
500,000,000 
500,000,000 
Common stock, shares issued
161,338,746 
129,700,000 
Common stock, shares outstanding
161,338,746 
129,700,000 
Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Revenues:
 
 
 
 
Home sales
$ 471,801 
$ 304,571 
$ 1,023,312 
$ 744,598 
Land and lot sales
5,550 
18,724 
36,449 
39,493 
Other operations
569 
573 
8,854 
3,128 
Total revenues
477,920 
323,868 
1,068,615 
787,219 
Expenses:
 
 
 
 
Cost of home sales
385,400 
236,691 
819,377 
585,605 
Cost of land and lot sales
2,317 
10,428 
30,245 
31,087 
Other operations
556 
549 
2,755 
2,374 
Sales and marketing
28,393 
24,554 
73,096 
65,436 
General and administrative
20,951 
19,817 
57,140 
57,113 
Restructuring charges
7,024 
384 
9,202 
3,451 
Total expenses
444,641 
292,423 
991,815 
745,066 
Income from operations
33,279 
31,445 
76,800 
42,153 
Equity in (loss) income of unconsolidated entities
(82)
(101)
(219)
167 
Transaction expenses
(16,710)
 
(17,216)
 
Other income (expense), net
499 
186 
(242)
1,739 
Income from continuing operations before taxes
16,986 
31,530 
59,123 
44,059 
Provision for income taxes
(6,021)
(11,589)
(16,352)
(15,732)
Income from continuing operations
10,965 
19,941 
42,771 
28,327 
Discontinued operations, net of income taxes
 
218 
   
384 
Net income
$ 10,965 
$ 20,159 
$ 42,771 
$ 28,711 
Basic
 
 
 
 
Continuing operations
$ 0.07 
$ 0.15 
$ 0.31 
$ 0.22 
Discontinued operations
 
$ 0.01 
 
 
Net earnings per share
$ 0.07 
$ 0.16 
$ 0.31 
$ 0.22 
Diluted
 
 
 
 
Continuing operations
$ 0.07 
$ 0.15 
$ 0.31 
$ 0.22 
Discontinued operations
   
   
   
   
Net earnings per share
$ 0.07 
$ 0.15 
$ 0.31 
$ 0.22 
Weighted average shares outstanding
 
 
 
 
Basic
158,931,450 
129,700,000 
139,550,891 
129,700,000 
Diluted
159,158,706 
130,699,408 
140,213,655 
131,164,474 
Consolidated Statement of Equity (USD $)
In Thousands, except Share data
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
TRI Pointe [Member]
Noncontrolling Interests [Member]
Beginning Balance at Dec. 31, 2012
$ 993,727 
$ 1,297 
$ 340,817 
$ 611,665 
$ 953,779 
$ 39,948 
Beginning Balance , Shares at Dec. 31, 2012
 
129,700,000 
 
 
 
 
Net income (loss)
(149,455)
 
 
(149,455)
(149,455)
 
Return of capital to Weyerhaeuser
(13,920)
 
(13,920)
 
(13,920)
 
Excess tax benefit of share-based awards, net
1,690 
 
1,690 
 
1,690 
 
Stock-based compensation expense
5,002 
 
5,002 
 
5,002 
 
Contributions from (distributions to) noncontrolling interests, net
(7,121)
 
 
 
 
(7,121)
Net effect of consolidations, de-consolidations and other transactions
(4,406)
 
 
 
 
(4,406)
Ending Balance at Dec. 31, 2013
825,517 
1,297 
333,589 
462,210 
797,096 
28,421 
Ending Balance, Shares at Dec. 31, 2013
129,700,000 
129,700,000 
 
 
 
 
Net income (loss)
42,771 
 
 
42,771 
42,771 
 
Capital contribution by Weyerhaeuser, net
61,687 
 
61,687 
 
61,687 
 
Common shares issued in connection with merger (Note 2)
498,973 
316 
498,657 
 
498,973 
 
Common shares issued in connection with merger, Shares
 
31,632,533 
 
 
 
 
Shares issued through stock plans
 
6,213 
 
 
 
 
Excess tax benefit of share-based awards, net
1,320 
 
1,320 
 
1,320 
 
Stock-based compensation expense
7,518 
 
7,518 
 
7,518 
 
Contributions from (distributions to) noncontrolling interests, net
(18,703)
 
 
 
 
(18,703)
Net effect of consolidations, de-consolidations and other transactions
4,497 
 
 
 
 
4,497 
Ending Balance at Sep. 30, 2014
$ 1,423,580 
$ 1,613 
$ 902,771 
$ 504,981 
$ 1,409,365 
$ 14,215 
Ending Balance, Shares at Sep. 30, 2014
161,338,746 
161,338,746 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Cash flows from operating activities
 
 
Net income
$ 42,771 
$ 28,711 
Adjustments to reconcile net income to net cash used in operating activities:
 
 
Depreciation and amortization
10,578 
9,219 
Equity in (income) loss of unconsolidated entities, net
219 
(167)
Deferred income taxes, net
21,937 
9,008 
Amortization of stock-based compensation
7,518 
3,704 
Charges for impairment of assets
1,124 
1,245 
Bridge commitment fee
10,322 
 
Changes in assets and liabilities:
 
 
Real estate inventories
(249,890)
(178,954)
Receivables
34,107 
(4,832)
Other assets
(6,484)
(13,936)
Accounts payable
(822)
(7,594)
Accrued expenses and other liabilities
(11,874)
22,091 
Returns on investments in unconsolidated entities, net
 
1,111 
Other operating cash flows
65 
114 
Net cash used in operating activities
(140,429)
(130,280)
Cash flows from investing activities
 
 
Purchases of property and equipment
(6,068)
(8,755)
Cash acquired in the merger
53,800 
 
Proceeds from sale of property and equipment
22 
Investments in unconsolidated entities
(573)
(380)
Net cash provided by (used in) investing activities
47,181 
(9,131)
Cash flows from financing activities
 
 
Borrowings from notes payable
50,000 
 
Proceeds from the issuance of senior notes
886,698 
 
Debt issuance costs for senior notes
(23,003)
 
Bridge commitment fee
(10,322)
 
Changes in debt payable to Weyerhaeuser, net
(623,589)
142,645 
Change in book overdrafts
(22,492)
8,359 
Excess tax benefits of share-based awards
1,572 
1,697 
Capital contribution from (distribution to) Weyerhaeuser
(8,860)
(13,225)
Net proceeds of debt held by variable interest entities
5,120 
 
Distributions to noncontrolling interests, net
(18,703)
 
Net cash provided by financing activities
236,421 
139,476 
Net increase in cash and cash equivalents
143,173 
65 
Cash and cash equivalents - beginning of period
4,510 
5,212 
Cash and cash equivalents - end of period
$ 147,683 
$ 5,277 
Organization, Basis of Presentation and Summary of Significant Accounting Policies
Organization, Basis of Presentation and Summary of Significant Accounting Policies
1. Organization, Basis of Presentation and Summary of Significant Accounting Policies

Organization

TRI Pointe Homes, Inc. is engaged in the design, construction and sale of innovative single-family homes through its portfolio of six quality brands across eight states, including Maracay Homes in Arizona, Pardee Homes in California and Nevada, Quadrant Homes in Washington, Trendmaker Homes in Texas, TRI Pointe Homes in California and Colorado and Winchester homes in Maryland and Virginia. Unless the context herein otherwise requires, the terms “we,” “us,” “our,” “TRI Pointe” and “the Company” refer to TRI Pointe Homes, Inc. and its consolidated subsidiaries.

Basis of Presentation

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted.

In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly our consolidated financial position as of September 30, 2014, the results of our consolidated operations for the three and nine months ended September 30, 2014 and 2013, and our consolidated cash flows for the nine months ended September 30, 2014 and 2013. The results of our consolidated operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year due to the merger described below under “Reverse Acquisition” as well as seasonal variations in operating results and other factors. The consolidated balance sheet at December 31, 2013 has been taken from the audited consolidated financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2013, which are contained in our Annual Report on Form 10-K for that period and the audited consolidated financial statements of Weyerhaeuser Real Estate Company for the year ended December 31, 2013, which are contained in our proxy statement for our 2014 Annual Meeting of Stockholders.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries as described in “Reverse Acquisition” below. All significant intercompany accounts have been eliminated upon consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. Subsequent events have been evaluated through the date the financial statements were issued.

Reverse Acquisition

On July 7, 2014 (the “Closing Date”), TRI Pointe consummated the previously announced merger (the “Merger”) of our wholly owned subsidiary, Topaz Acquisition, Inc. (“Merger Sub”), with and into Weyerhaeuser Real Estate Company (“WRECO”), with WRECO surviving the Merger and becoming our wholly owned subsidiary, as contemplated by the Transaction Agreement, dated as of November 3, 2013 (the “Transaction Agreement”), by and among us, Weyerhaeuser Company (“Weyerhaeuser”), the Company, WRECO and Merger Sub. The Merger is accounted for in accordance with ASC Topic 805, Business Combinations (“ASC 805”). For accounting purposes, the Merger is treated as a “reverse acquisition” and WRECO is considered the accounting acquirer. Accordingly, WRECO is reflected as the predecessor and acquirer and therefore the accompanying consolidated financial statements reflect the historical consolidated financial statements of WRECO for all periods presented and do not include the historical financial statements of TRI Pointe prior to the Closing Date. Subsequent to the Closing Date, the consolidated financial statements reflect the results of the combined company. See Note 2, Merger with Weyerhaeuser Real Estate Company, for further information on the Merger. In the Merger, each issued and outstanding WRECO common share was converted into 1.297 shares of TRI Pointe common stock. The historical issued and outstanding WRECO common shares have been recast in all periods presented to reflect this conversion.

 

Use of Estimates

Our financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of costs and expenses during the reporting period. On an ongoing basis, our management evaluates its estimates and judgments. Our management bases its estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from our estimates.

Cash and Cash Equivalents and Concentration of Credit Risk

We define cash and cash equivalents as cash on hand, demand deposits with financial institutions, and short-term liquid investments with an initial maturity date of less than three months. The Company’s cash balances exceed federally insurable limits. The Company monitors the cash balances in its operating accounts and adjusts the cash balances as appropriate; however, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, the Company has experienced no loss or lack of access to cash in its operating accounts.

Real Estate Inventories and Cost of Sales

We capitalize pre-acquisition, land, development and other allocated costs, including interest, during development and home construction. Applicable costs incurred after development or construction is substantially complete are charged to selling, general and administrative, and other expenses as appropriate. Pre-acquisition costs, including non-refundable land deposits, are expensed to cost of home sales when we determine continuation of the respective project is not probable. In accordance with ASC Topic 835, Interest (“ASC 835”), interest capitalized as a cost of inventories owned is included in cost of sales as related units or lots are sold. To the extent our debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the interest incurred by us. Qualified assets represent projects that are actively under development.

Land, development and other common costs are typically allocated to inventory using a methodology that approximates the relative-sales-value method. Home construction costs per production phase are recorded using the specific identification method. Cost of sales for homes closed includes the allocation of construction costs of each home and all applicable land acquisition, land development and related common costs (both incurred and estimated to be incurred) based upon the relative-sales-value of the home within each community. Changes to estimated total development costs subsequent to initial home closings in a community are generally allocated on a relative-sales-value method to remaining homes in the community. Inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is written down to fair value. We review our real estate assets in each community for indicators of impairment. Real estate assets include projects actively selling and projects under development or held for future development. Indicators of impairment include, but are not limited to, decreases in local housing market values and selling prices of comparable homes, decreases in gross margins and sales absorption rates, costs in excess of budget, and actual or projected cash flow losses.

If there are indications of impairment, we perform a detailed budget and cash flow review of the applicable community to determine whether the estimated remaining undiscounted future cash flows of the community are more or less than the asset’s carrying value. If the undiscounted cash flows are more than the asset’s carrying value, no impairment adjustment is required. However, if the undiscounted cash flows are less than the asset’s carrying value, the asset is deemed impaired and is written down to fair value. These impairment evaluations require us to make estimates and assumptions regarding future conditions, including timing and amounts of development costs and sales prices of real estate assets, to determine if expected future undiscounted cash flows will be sufficient to recover the asset’s carrying value.

When estimating undiscounted cash flows of a community, we make various assumptions, including: (i) expected sales prices and sales incentives to be offered, including the number of homes available, pricing and incentives being offered by us or other builders in other communities, and future sales price adjustments based on market and economic trends; (ii) expected sales pace and cancellation rates based on local housing market conditions, competition and historical trends; (iii) costs expended to date and expected to be incurred including, but not limited to, land and land development costs, home construction costs, interest costs, indirect construction and overhead costs, and selling and marketing costs; (iv) alternative product offerings that may be offered which could have an impact on sales pace, sales price and/or building costs; and (v) alternative uses for the property.

 

Many assumptions are interdependent and a change in one may require a corresponding change to other assumptions. For example, increasing or decreasing sales absorption rates has a direct impact on the estimated per unit sales price of a home, the level of time-sensitive costs (such as indirect construction, overhead and carrying costs), and selling and marketing costs (such as model maintenance costs and advertising costs). Depending on the underlying objective of the community, assumptions could have a significant impact on the projected cash flow analysis. For example, if our objective is to preserve operating margins, our cash flow analysis will be different than if the objective is to increase sales. These objectives may vary significantly from community to community and over time. If an asset is considered impaired, impairment is determined by the amount the asset’s carrying value exceeds its fair value. Fair value is determined based on estimated future cash flows discounted for inherent risks associated with real estate assets. These discounted cash flows are impacted by expected risk based on estimated land development, construction and delivery timelines, market risk of price erosion, uncertainty of development or construction cost increases; and other risks specific to the asset or market conditions where the asset is located when assessment is made. These factors are specific to each community and may vary among communities.

Revenue Recognition

In accordance with ASC Topic 360, Property, Plant, and Equipment, revenues from home sales and other real estate sales are recorded and a profit is recognized when the respective units are delivered. Home sales and other real estate sales are closed when all conditions of escrow are met, including delivery of the home or other real estate asset, title passage, appropriate consideration is received and collection of associated receivables, if any, is reasonably assured. Sales incentives are a reduction of revenues when the respective unit is closed. When it is determined that the earnings process is not complete, the sale and the related profit are deferred for recognition in future periods. The profit we record is based on the calculation of cost of sales, which is dependent on our allocation of costs, as described in more detail above in the section entitled “—Real Estate Inventories and Cost of Sales.”

Warranty Reserves

Estimated future direct warranty costs are accrued and charged to cost of home sales in the period when the related home sales revenues are recognized. Amounts accrued are based upon historical experience rates. We also consider historical experience of our peers. Indirect warranty overhead salaries and related costs are charged to the reserve in the period incurred. We assess the adequacy of our warranty accrual on a quarterly basis and adjust the amounts recorded if necessary. Our warranty accrual is included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.

Investments in Unconsolidated Entities

We have investments in unconsolidated entities over which we have significant influence that we account for using the equity method with taxes provided on undistributed earnings. We record earnings and accrue taxes in the period that the earnings are recorded by our affiliates. Under the equity method, our share of the unconsolidated entities’ earnings or loss is included in equity in income of unconsolidated entities in the accompanying consolidated statement of operations. We evaluate our investments in unconsolidated entities for impairment when events and circumstances indicate that the carrying value of the investment may not be recoverable.

Variable Interest Entities

The Company accounts for variable interest entities in accordance with ASC Topic 810, Consolidation (“ASC 810”). Under ASC 810, a variable interest entity (“VIE”) is created when: (a) the equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties, including the equity holders; (b) the entity’s equity holders as a group (i) lack the direct or indirect ability to make decisions about the entity, (ii) are not obligated to absorb expected losses of the entity or (iii) do not have the right to receive expected residual returns of the entity; or (c) the entity’s equity holders have voting rights that are not proportionate to their economic interests, and the activities of the entity involve, or are conducted on behalf of, the equity holder with disproportionately few voting rights. If an entity is deemed to be a VIE pursuant to ASC 810, the enterprise that has both (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb the expected losses of the entity or right to receive benefits from the entity that could be potentially significant to the VIE is considered the primary beneficiary and must consolidate the VIE.

Under ASC 810, a non-refundable deposit paid to an entity is deemed to be a variable interest that will absorb some or all of the entity’s expected losses if they occur. Our land purchase and lot option deposits generally represent our maximum exposure to the land seller if we elect not to purchase the optioned property. In some instances, we may also expend funds for due diligence, development and construction activities with respect to optioned land prior to takedown. Such costs are classified as inventories owned, which we would have to write off should we not exercise the option. Therefore, whenever we enter into a land option or purchase contract with an entity and make a non-refundable deposit, a VIE may have been created. In accordance with ASC 810, we perform ongoing reassessments of whether we are the primary beneficiary of a VIE.

Stock-Based Compensation

We account for share-based awards in accordance with ASC Topic 718, Compensation-Stock Compensation (“ASC 718”). ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. ASC 718 requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees.

Sales and Marketing Expense

Sales and marketing costs incurred to sell real estate projects are capitalized if they are reasonably expected to be recovered from the sale of the project or from incidental operations and are incurred for tangible assets that are used directly through the selling period to aid in the sale of the project or services that have been performed to obtain regulatory approval of sales. All other selling expenses and other marketing costs are expensed in the period incurred.

Income Taxes

Income taxes are accounted for in accordance with ASC Topic 740, Income Taxes (“ASC 740”). The provision for, or benefit from, income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are evaluated on a quarterly basis to determine if adjustments to the valuation allowance are required. In accordance with ASC 740, we assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. The ultimate realization of deferred tax assets depends primarily on the generation of future taxable income during the periods in which the differences become deductible. The value of our deferred tax assets will depend on applicable income tax rates. Judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial statements.

ASC 740 defines the methodology for recognizing the benefits of uncertain tax return positions as well as guidance regarding the measurement of the resulting tax benefits. These provisions require an enterprise to recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. In addition, these provisions provide guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The evaluation of whether a tax position meets the more-likely-than-not recognition threshold requires a substantial degree of judgment by management based on the individual facts and circumstances. Actual results could differ from estimates.

Recently Issued Accounting Standards

In April 2014, the FASB issued amendments to Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The update requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. The amendments are effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014 (early adoption is permitted only for disposals that have not been previously reported). The implementation of the amended guidance is not expected to have a material impact on our consolidated financial position or results of operations.

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 supersedes the revenue-recognition requirements in ASC Topic 605, Revenue Recognition, most industry-specific guidance throughout the industry topics of the accounting standards codification, and some cost guidance related to construction-type and production-type contracts. ASU 2014-09 is effective for public entities for the annual periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and provide related disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. We believe the adoption of this guidance will not have a material effect on our consolidated financial statements.

Merger with Weyerhaeuser Real Estate Company
Merger with Weyerhaeuser Real Estate Company
2. Merger with Weyerhaeuser Real Estate Company

In the Merger, TRI Pointe issued 129,700,000 shares of TRI Pointe common stock to the former holders of WRECO common shares, together with cash in lieu of any fractional shares. On the Closing Date, WRECO became a wholly owned subsidiary of TRI Pointe. Immediately following the consummation of the Merger, the ownership of TRI Pointe common stock on a fully diluted basis was as follows: (i) the WRECO common shares held by former Weyerhaeuser shareholders were converted into the right to receive, in the aggregate, approximately 79.6% of the then outstanding TRI Pointe common stock, (ii) the TRI Pointe common stock outstanding immediately prior to the consummation of the Merger represented approximately 19.4% of the then outstanding TRI Pointe common stock, and (iii) the outstanding equity awards of WRECO and TRI Pointe employees represented the remaining 1.0% of the then outstanding TRI Pointe common stock. On the Closing Date, the former direct parent entity of WRECO paid TRI Pointe $31.5 million in cash in accordance with the Transaction Agreement.

Assumption of Senior Notes

On the Closing Date, TRI Pointe assumed WRECO’s obligations as issuer of $450 million aggregate principal amount of its 4.375% Senior Notes due 2019 (the “2019 Notes”) and $450 million aggregate principal amount of its 5.875% Senior Notes due 2024 (the “2024 Notes” and together with the 2019 Notes, the “Senior Notes”). Additionally, WRECO and certain of its subsidiaries (collectively, the “Guarantors”) entered into supplemental indentures pursuant to which they guaranteed TRI Pointe’s obligations with respect to the Senior Notes. The Guarantors also entered into a joinder agreement to the Purchase Agreement, dated as of June 4, 2014, among WRECO, TRI Pointe, and the initial purchasers of the Senior Notes (collectively, the “Initial Purchasers”), pursuant to which the Guarantors became parties to the Purchase Agreement. Additionally, TRI Pointe and the Guarantors entered into joinder agreements to the Registration Rights Agreements, dated as of June 13, 2014, among WRECO and the Initial Purchasers with respect to the Senior Notes, pursuant to which TRI Pointe and the Guarantors were joined as parties to the Registration Rights Agreements.

The net proceeds of approximately $861.3 million from the offering of the Senior Notes were deposited into two separate escrow accounts following the closing of the offering on June 13, 2014. Upon release of the escrowed funds on the Closing Date and prior to the consummation of the Merger, WRECO paid approximately $743.7 million in cash to its former direct parent, which cash was retained by Weyerhaeuser and its subsidiaries (other than WRECO and its subsidiaries). The payment consisted of the $739.0 million Payment Amount (as defined in the Transaction Agreement) as well as approximately $4.7 million in payment of all unpaid interest on the debt payable to Weyerhaeuser that accrued from November 3, 2013 to the Closing Date. The remaining $117.6 million of proceeds was retained by TRI Pointe.

Transaction Expenses

Advisory, financing, integration and other transaction costs directly related to the Merger, excluding the impact of restructuring costs and purchase accounting adjustments, totaled $16.7 million and $17.2 million during the three and nine months ended September 30, 2014, respectively. The Company expects to incur additional expenses in connection with the Merger during the three months ended December 31, 2014. See Note 3, Restructuring, for a discussion of the restructuring costs incurred in connection with the Merger.

Fair Value of Assets and Liabilities Acquired

The following table summarizes the calculation of the fair value of the total consideration transferred and the provisional amounts recognized as of the Closing Date (in thousands, except shares and closing stock price):

 

Calculation of consideration transferred

  

TRI Pointe shares outstanding

     31,632,533   

TRI Pointe closing stock price on July 7, 2014

   $ 15.85   
  

 

 

 

Consideration attributable to common stock

   $ 501,376   

Consideration attributable to TRI Pointe equity awards

     1,072   
  

 

 

 

Total consideration transferred

   $ 502,448   
  

 

 

 

Assets acquired and liabilities assumed

  

Cash and cash equivalents

   $ 53,800   

Accounts receivable

     654   

Real estate inventories

     554,038   

Intangible asset

     13,200   

Goodwill

     132,451   

Other assets

     28,060   
  

 

 

 

Total assets acquired

     782,203   
  

 

 

 

Accounts payable

     26,105   

Accrued expenses and other liabilities

     26,522   

Notes payable and other borrowings

     227,128   
  

 

 

 

Total liabilities assumed

     279,755   
  

 

 

 

Total net assets acquired

   $ 502,448   
  

 

 

 

Cash and cash equivalents, accounts receivable, other assets, accounts payable, accrued payroll liabilities, and accrued expenses and other liabilities were generally stated at historical carrying values given the short-term nature of these assets and liabilities. Notes payable and other borrowings are stated at carrying value due to the limited amount of time since the notes payable and other borrowings were entered into prior to the Closing Date.

The Company determined the fair value of real estate inventories on a community-by-community basis primarily using a combination of market-comparable land transactions, land residual analysis and discounted cash flow models. The estimated fair value is significantly impacted by estimates related to expected average selling prices, sales pace, cancellation rates and construction and overhead costs. Such estimates must be made for each individual community and may vary significantly between communities.

The fair value of the acquired intangible asset was determined based on a valuation performed by an independent valuation specialist. The $13.2 million intangible asset is related to the TRI Pointe trade name which is deemed to have an indefinite useful life.

Goodwill is primarily attributed to expected synergies from combining WRECO’s and TRI Pointe’s existing businesses, including, but not limited to, expected cost synergies from overhead savings resulting from streamlining certain redundant corporate functions, improved operating efficiencies, including provision of certain corporate level administrative and support functions at a lower cost than was historically allocated to WRECO for such services by its former direct parent, and growth of ancillary operations in various markets as permitted under applicable law, including a mortgage business, a title company and other ancillary operations. The Company also anticipates opportunities for growth through expanded geographic and customer segment diversity and the ability to leverage additional brands.

The Company has completed the majority of its business combination accounting as of September 30, 2014 and expects to substantially complete the remainder in the fourth quarter of 2014. As of September 30, 2014, the Company had not completed its final review of the valuation of acquired inventory, investments in unconsolidated entities, income taxes and deferred income tax assets and liabilities, and certain other assets and liabilities. Final determinations of the values of assets acquired and liabilities assumed may result in adjustments to the values presented above and a corresponding adjustment to goodwill.

Supplemental Pro Forma Information

The following represents unaudited pro forma operating results as if the acquisition had been completed as of January 1, 2013 (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  

Total revenues

   $ 479,879       $ 382,407       $ 1,230,722       $ 924,733   

Net income

   $ 21,934       $ 25,192       $ 66,902       $ 30,795   

Earnings per share - basic

   $ 0.14       $ 0.16       $ 0.41       $ 0.19   

Earnings per share - diluted

   $ 0.14       $ 0.16       $ 0.41       $ 0.19   

The unaudited pro forma operating results have been determined after adjusting the operating results of TRI Pointe to reflect the purchase accounting and other acquisition adjustments including interest expense associated with the debt used to fund a portion of the Merger. The unaudited pro forma results do not reflect any cost savings, operating synergies or other enhancements that we may achieve as a result of the Merger or the costs necessary to integrate the operations to achieve these cost savings and synergies. Accordingly, the unaudited pro forma amounts are for comparative purposes only and may not necessarily reflect the results of operations had the Merger been completed at the beginning of the period or be indicative of the results we will achieve in the future.

Restructuring
Restructuring
3. Restructuring

In connection with the Merger, the Company initiated a restructuring plan to reduce duplicate corporate and divisional overhead costs and expenses. In addition, the predecessor previously recognized restructuring expenses related to general cost reduction initiatives. Restructuring costs were comprised of the following (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  

Employee-related costs

   $ 6,817       $ —         $ 8,124       $ 63   

Lease termination costs

     207         384         1,078         3,388   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,024       $ 384       $ 9,202       $ 3,451   
  

 

 

    

 

 

    

 

 

    

 

 

 

Employee-related costs incurred during the three months ended September 30, 2014 included employee retention and severance-related expenses of $5.5 million and stock-based compensation expense of $1.3 million for employees terminated during the period. Lease termination costs of $207,000 and $384,000 during the three months ended September 30, 2014 and 2013, respectively, relate to contract terminations as a result of general cost reduction initiatives. Employee-related costs incurred during the nine months ended September 30, 2014 included employee retention and severance-related expenses of $6.8 million and stock-based compensation expense of $1.3 million for employees terminated during the period. Lease termination costs of $1.1 million and $3.4 million during the nine months ended September 30, 2014 and 2013, respectively, relate to contract terminations as a result of general cost reduction initiatives. The Company expects to incur additional employee-related restructuring costs during the remainder of 2014.

Changes in employee-related restructuring reserves were as follows (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014     2013      2014     2013  

Accrued employee-related costs, beginning of period

   $ —        $ —         $ 4,336      $ 28   

Current year charges

     5,550        —           6,857        63   

Payments

     (1,576     —           (7,219     (91
  

 

 

   

 

 

    

 

 

   

 

 

 

Accrued employee-related costs, end of period

   $ 3,974      $ —         $ 3,974      $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Changes in lease termination related restructuring reserves were as follows (in thousands):

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  

Accrued lease termination costs, beginning of period

   $ 2,454      $ 3,637      $ 3,506      $ 2,335   

Current year charges

     207        384        1,078        3,388   

Payments

     (902     (1,129     (2,825     (2,831
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued lease termination costs, end of period

   $ 1,759      $ 2,892      $ 1,759      $ 2,892   
  

 

 

   

 

 

   

 

 

   

 

 

 

Employee and lease termination restructuring reserves are included in accrued expenses and other liabilities on our consolidated balance sheets.

Segment Information
Segment Information
4. Segment Information

Our operations consist of six homebuilding companies where we acquire and develop land and construct and sell single-family homes. In accordance with ASC Topic 280, Segment Reporting, in determining the most appropriate reportable segments, we considered similar economic and other characteristics, including product types, average selling prices, gross profits, production processes, suppliers, subcontractors, regulatory environments, land acquisition results, and underlying demand and supply. Based on our aggregation analysis, we have not exercised any aggregation of our operating segments, which are represented by the following six reportable segments: Maracay, consisting of operations in Arizona; Pardee, consisting of operations in California and Nevada; Quadrant, consisting of operations in Washington; Trendmaker, consisting of operations in Texas; TRI Pointe, consisting of operations in California and Colorado; and Winchester, consisting of operations in Maryland and Virginia.

Corporate is a non-operating segment that develops and implements company-wide strategic initiatives and provides support to our homebuilding reporting segments by centralizing certain administrative functions, such as marketing, legal, accounting, treasury, insurance and risk management, information technology and human resources, to benefit from economies of scale. Our Corporate non-operating segment also includes general and administrative expenses related to operating our corporate headquarters. A portion of the expenses incurred by Corporate is allocated to the homebuilding reporting segments.

The reportable segments follow the same accounting policies as our consolidated financial statements described in Note 1. Operational results of each reportable segment are not necessarily indicative of the results that would have been achieved had the reportable segment been an independent, stand-alone entity during the periods presented.

Total revenues and income from continuing operations before income taxes for each of our reportable segments were as follows (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  

Total revenues

           

Maracay

   $ 37,301       $ 42,391       $ 107,576       $ 81,210   

Pardee

     134,409         129,650         352,118         319,286   

Quadrant

     32,919         29,931         96,958         87,982   

Trendmaker

     69,711         72,243         198,867         193,323   

TRI Pointe

     123,445         —           123,445         —     

Winchester

     80,135         49,653         189,651         105,418   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 477,920       $ 323,868       $ 1,068,615       $ 787,219   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  

Income from continuing operations before taxes

        

Maracay

   $ 2,212      $ 2,496      $ 8,222      $ 2,203   

Pardee

     21,787        25,714        47,580        42,865   

Quadrant

     649        (73     6,889        1,061   

Trendmaker

     7,327        8,052        21,529        20,964   

TRI Pointe

     8,685        —          8,685        —     

Winchester

     6,941        5,663        17,978        6,570   

Corporate(1)

     (30,615     (10,322     (51,760     (29,604
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 16,986      $ 31,530      $ 59,123      $ 44,059   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes $16.7 million and $17.2 million of Merger related transaction costs and $7.0 and $9.2 million of restructuring charges for the three and nine months ended September 30, 2014, respectively.

Total real estate inventories and total assets for each of our reportable segments, as of the date indicated, were as follows (in thousands):

 

     September 30,      December 31,  
     2014      2013  

Real estate inventories

     

Maracay

   $ 152,969       $ 131,380   

Pardee

     929,548         875,618   

Quadrant

     159,989         113,088   

Trendmaker

     157,997         130,973   

TRI Pointe

     596,799         —     

Winchester

     266,438         214,467   
  

 

 

    

 

 

 
   $ 2,263,740       $ 1,465,526   
  

 

 

    

 

 

 
     September 30,      December 31,  
     2014      2013  

Total assets

     

Maracay

   $ 167,567       $ 138,552   

Pardee

     1,079,693         976,262   

Quadrant

     185,880         125,456   

Trendmaker

     176,834         134,628   

TRI Pointe

     597,232         —     

Winchester

     346,404         234,419   

Corporate and Other

     297,786         301,147   
  

 

 

    

 

 

 
   $ 2,851,396       $ 1,910,464   
  

 

 

    

 

 

 
Earnings Per Share
Earnings Per Share
5. Earnings Per Share

The following table sets forth the components used in the computation of basic and diluted earnings per share (in thousands, except share and per share amounts):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2014      2013      2014      2013  

Numerator:

           

Income from continuing operations

   $ 10,965       $ 19,941       $ 42,771       $ 28,327   

Discontinued operations, net of income taxes

     —           218         —           384   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 10,965       $ 20,159       $ 42,771       $ 28,711   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Basic weighted-average shares outstanding

     158,931,450         129,700,000         139,550,891         129,700,000   

Effect of dilutive shares:

           

Stock options and unvested restricted stock units

     227,256         999,408         662,764         1,464,474   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted-average shares outstanding

     159,158,706         130,699,408         140,213,655         131,164,474   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share

           

Basic

           

Continuing operations

   $ 0.07       $ 0.15       $ 0.31       $ 0.22   

Discontinued operations

     —           0.01         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings per share

   $ 0.07       $ 0.16       $ 0.31       $ 0.22   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

           

Continuing operations

   $ 0.07       $ 0.15       $ 0.31       $ 0.22   

Discontinued operations

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings per share

   $ 0.07       $ 0.15       $ 0.31       $ 0.22   
  

 

 

    

 

 

    

 

 

    

 

 

 

Antidilutive stock options not included in diluted earnings per share

     3,634,614         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
Receivables
Receivables
6. Receivables

Receivables consisted of the following (in thousands):

 

     September 30,      December 31,  
     2014      2013  

Accounts receivable, net

   $ 15,881       $ 8,649   

Warranty insurance receivable

     10,762         12,489   

Notes and contracts receivable

     300         39,259   
  

 

 

    

 

 

 

Total receivables

   $ 26,943       $ 60,397   
  

 

 

    

 

 

 
Real Estate Inventories
Real Estate Inventories
7. Real Estate Inventories

Real estate inventories consisted of the following (in thousands):

 

     September 30,      December 31,  
     2014      2013  

Real estate inventories owned:

     

Homes completed or under construction

   $ 567,359       $ 308,856   

Land under development

     1,272,041         760,731   

Land held for future use

     249,561         264,120   

Model homes

     93,049         53,351   
  

 

 

    

 

 

 

Total real estate inventories owned

     2,182,010         1,387,058   

Real estate inventories not owned:

     

Land purchase and land option deposits

     50,531         38,788   

Consolidated inventory held by VIEs

     31,199         39,680   
  

 

 

    

 

 

 

Total real estate inventories not owned

     81,730         78,468   
  

 

 

    

 

 

 

Total real estate inventories

   $ 2,263,740       $ 1,465,526   
  

 

 

    

 

 

 

 

Homes completed or under construction is comprised of costs associated with homes in various stages of construction and includes direct construction and related land acquisition and land development costs. Land under development primarily consists of land acquisition and land development costs, which include capitalized interest and real estate taxes, associated with land undergoing improvement activity. Land held for future use principally reflects land acquisition and land development costs related to land where development activity has not yet begun or has been suspended, but is expected to occur in the future.

Real estate inventories not owned represents deposits related to land purchase and land option agreements as well as consolidated inventory held by a VIE. For further details, see Note 9, Variable Interest Entities.

Interest incurred, capitalized and expensed were as follows (in thousands):

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  

Interest incurred

   $ 15,129      $ 5,744      $ 25,718      $ 16,348   

Interest capitalized

     (14,839     (4,916     (22,987     (14,142
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expensed

   $ 290      $ 828      $ 2,731      $ 2,206   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capitalized interest in beginning inventory

   $ 113,765      $ 145,930      $ 138,233      $ 155,823   

Interest capitalized as a cost of inventory

     14,839        4,916        22,987        14,142   

Interest previously capitalized as a cost of inventory, included in cost of sales

     (7,835     (8,730     (40,451     (27,849
  

 

 

   

 

 

   

 

 

   

 

 

 

Capitalized interest in ending inventory

   $ 120,769      $ 142,116      $ 120,769      $ 142,116   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest is capitalized to real estate inventory during development and other qualifying activities. Interest that is capitalized to real estate inventory is included in cost of home sales as related units are delivered. Interest that is expensed as incurred is included in other income (expense).

Real estate inventory impairments and land option abandonments

Real estate inventory impairments and land option abandonments consisted of the following (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  

Real estate inventory impairments

   $ 248       $ 230       $ 300       $ 592   

Land option abandonments and pre-acquisition costs

     304         319         824         653   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 552       $ 549       $ 1,124       $ 1,245   
  

 

 

    

 

 

    

 

 

    

 

 

 

Impairments of homebuilding assets and related charges relate primarily to projects or communities held for development. Within a community that is held for development, there may be individual homes or parcels of land that are currently held for sale. Impairment charges recognized as a result of adjusting individual held-for-sale assets within a community to estimated fair value less cost to sell are also included in the total impairment charges above.

In addition to owning land and residential lots, we also have option agreements to purchase land and lots at a future date. We have option deposits and capitalized pre-acquisition costs associated with the optioned land and lots. When the economics of a project no longer support acquisition of the land or lots under option, we may elect not to move forward with the acquisition. Option deposits and capitalized pre-acquisition costs associated with the assets under option may be forfeited at that time. Charges for such forfeitures are expensed to cost of sales.

Investments in Unconsolidated Entities
Investments in Unconsolidated Entities
8. Investments in Unconsolidated Entities

As of September 30, 2014, we held equity investments in five active real estate partnerships or limited liability companies. Our participation in these entities may be as a developer, a builder, or an investment partner. Our ownership percentage varies from 7% to 50%, depending on the investment.

Investments Held

Our cumulative investment in entities accounted for on the equity method, including our share of earnings and losses, consisted of the following (in thousands):

 

     September 30,      December 31,  
     2014      2013  

Limited partnership and limited liability company interests

   $ 13,135       $ 18,454   

General partnership interests

     2,937         2,469   
  

 

 

    

 

 

 

Total

   $ 16,072       $ 20,923   
  

 

 

    

 

 

 

Unconsolidated Financial Information

Aggregated assets, liabilities and operating results of the entities we account for as equity-method investments are provided below. Because our ownership interest in these entities varies, a direct relationship does not exist between the information presented below and the amounts that are reflected on our consolidated balance sheets as our investment in unconsolidated entities or on our consolidated statement of operations as equity in (loss) income of unconsolidated entities.

Assets and liabilities of unconsolidated entities (in thousands):

 

     September 30,      December 31,  
     2014      2013  

Assets

   $ 138,845       $ 274,942   

Liabilities

   $ 17,158       $ 76,248   

Results of operations from unconsolidated entities (in thousands):

 

     Nine Months Ended
September 30,
    Year Ended
December 31,
 
     2014     2013  

Net sales and revenues

   $ 591      $ 6,271   

Operating loss

   $ (2,781   $ (1,250

Net loss

   $ (2,765   $ (1,268
Variable Interest Entities
Variable Interest Entities
9. Variable Interest Entities

In the ordinary course of business, we enter into land option agreements in order to procure land and residential lots for future development and the construction of homes. The use of such land option agreements generally allows us to reduce the risks associated with direct land ownership and development, and reduces our capital and financial commitments. Pursuant to these land option agreements, we generally provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Such deposits are recorded as land purchase and land option deposits under real estate inventories as land under development in the accompanying consolidated balance sheets.

We analyze each of our land option agreements and other similar contracts under the provisions of ASC 810 to determine whether the land seller is a VIE and, if so, whether we are the primary beneficiary. Although we do not have legal title to the underlying land, if we are determined to be the primary beneficiary of the VIE, we will consolidate the VIE in our financial statements and reflect its assets and liabilities as inventory and debt held by variable interest entities, with the net equity of the VIE owners reflected as noncontrolling interests. In determining whether we are the primary beneficiary, we consider, among other things, whether we have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. Such activities would include, among other things, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE.

 

Creditors of the entities with which we have land option agreements have no recourse against us. The maximum exposure to loss under our land option agreements is limited to non-refundable option deposits and any capitalized pre-acquisition costs. In some cases, we have also contracted to complete development work at a fixed cost on behalf of the land owner and budget shortfalls and savings will be borne by us.

The following provides a summary of our interests in land option agreements (in thousands):

 

     September 30, 2014      December 31, 2013  
            Remaining      Consolidated             Remaining      Consolidated  
            Purchase      Inventory             Purchase      Inventory  
     Deposits      Price      Held by VIEs      Deposits      Price      Held by VIEs  

Consolidated VIEs

   $ 8,265       $ 37,894       $ 31,199       $ 6,979       $ 34,724       $ 39,680   

Unconsolidated VIEs

     17,890         122,901         N/A         7,102         75,171         N/A   

Other land option agreements

     32,641         206,293         N/A         31,686         321,240         N/A   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 58,796       $ 367,088       $ 31,199       $ 45,767       $ 431,135       $ 39,680   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unconsolidated VIEs represent land option agreements that were not consolidated because we were not the primary beneficiary. Other land option agreements were not considered VIEs. Included in other land option agreements as of December 31, 2013, was a $1.0 million deposit with a remaining purchase price of $105.2 million related to a large master planned community north of Las Vegas, Nevada (“Coyote Springs”) which was excluded from the Merger.

In addition to the deposits presented in the table above, our exposure to loss related to our land option contracts consisted of capitalized pre-acquisition costs of $7.0 million as of September 30, 2014 and $4.8 million as of December 31, 2013. These pre-acquisition costs were included in real estate inventories on our consolidated balance sheets.

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
10. Goodwill and Other Intangible Assets

In connection with the Merger, $132.5 million of goodwill was recorded during the three months ended September 30, 2014. The Company has completed the majority of its business combination accounting as of September 30, 2014 and expects to substantially complete the remainder in the fourth quarter of 2014. For further details on the goodwill recorded during the quarter, see Note 2, Merger with Weyerhaeuser Real Estate Company.

We have two intangible assets recorded as of September 30, 2014, including an existing trade name from the acquisition of Maracay in 2006 which has a 20 year useful life and a new trade name, TRI Pointe, resulting from the Merger which has an indefinite useful life. For further details on the TRI Pointe trade name see Note 2, Merger with Weyerhaeuser Real Estate Company.

Goodwill and other intangible assets consisted of the following (in thousands):

 

     September 30, 2014      December 31, 2013  
     Gross            Net      Gross            Net  
     Carrying      Accumulated     Carrying      Carrying      Accumulated     Carrying  
     Amount      Amortization     Amount      Amount      Amortization     Amount  

Goodwill

   $ 132,451       $ —        $ 132,451       $ —         $ —        $ —     

Trade names

     23,879         (4,586     19,293         10,679         (4,185     6,494   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 156,330       $ (4,586   $ 151,744       $ 10,679       $ (4,185   $ 6,494   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The remaining useful life of our amortizing intangible asset related to Maracay was 11.4 and 12.2 years as of September 30, 2014 and December 31, 2013, respectively. Amortization expense related to this intangible asset was $133,000 for each of the three months ended September 30, 2014 and 2013, respectively and was $400,000 for each of the nine months ended September 30, 2014 and 2013, respectively. Our indefinite life intangible asset related to TRI Pointe is not amortizing.

Expected amortization of our intangible asset related to Maracay for the next five years and thereafter is (in thousands):

 

     September 30,  
     2014  

Remainder of 2014

   $ 133   

2015

     534   

2016

     534   

2017

     534   

2018

     534   

Thereafter

     3,824   
  

 

 

 

Total

   $ 6,093   
  

 

 

 
Other Assets
Other Assets
11. Other Assets

Other assets consisted of the following (in thousands):

 

     September 30,      December 31,  
     2014      2013  

Prepaid expenses

   $ 27,131       $ 8,590   

Refundable fees and other deposits

     17,647         19,566   

Development rights, held for future use or sale

     7,409         9,090   

Deferred loan costs

     24,699         —     

Operating properties and equipment, net

     10,644         17,386   

Income tax receivable

     8,297         —     

Other

     7,786         8,999   
  

 

 

    

 

 

 
   $ 103,613       $ 63,631   
  

 

 

    

 

 

 
Accrued Expenses and Other Liabilities
Accrued Expenses and Other Liabilities
12. Accrued Expenses and Other Liabilities

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

 

     September 30,      December 31,  
     2014      2013  

Accrued payroll

   $ 24,584       $ 48,232   

Accrued interest on senior notes and notes payable

     14,703         —     

Warranty reserves (Note 15)

     32,091         24,449   

Estimated cost for completion

     45,697         53,160   

Customer deposits

     18,693         13,432   

Debt (nonrecourse) held by VIEs

     10,729         6,571   

Income tax liability to Weyerhaeuser

     15,688         16,577   

Other

     38,909         28,261   
  

 

 

    

 

 

 
   $ 201,094       $ 190,682   
  

 

 

    

 

 

 
Senior Notes and Notes Payable and Other Borrowings
Senior Notes and Notes Payable and Other Borrowings
13. Senior Notes and Notes Payable and Other Borrowings

Senior Notes

Senior notes consisted of the following (in thousands):

 

     September 30,      December 31,  
     2014      2013  

4.375% Senior notes due June 15, 2019, net of discount

   $ 445,280       $ —     

5.875% Senior notes due June 15, 2024, net of discount

     441,850         —     
  

 

 

    

 

 

 
   $ 887,130       $ —     
  

 

 

    

 

 

 

 

As discussed in Note 2, Merger with Weyerhaeuser Real Estate Company, on the Closing Date, TRI Pointe assumed WRECO’s obligations as issuer of the 2019 Notes and the 2024 Notes. The 2019 Notes were issued at 98.89% of their aggregate principal amount and the 2024 Notes were issued at 98.15% of their aggregate principal amount. The net proceeds of approximately $861.3 million, after debt issuance costs and discounts, from the offering were deposited into two separate escrow accounts following the closing of the offering on June 13, 2014. Upon release of the escrowed funds on the Closing Date, and prior to the consummation of the Merger, WRECO paid approximately $743.7 million in cash to the former direct parent entity of WRECO, which cash was retained by Weyerhaeuser and its subsidiaries (other than WRECO and its subsidiaries). The payment consisted of the $739 million Payment Amount (as defined in the Transaction Agreement) as well as approximately $4.7 million in payment of all unpaid interest on the debt payable to Weyerhaeuser that accrued from November 3, 2013 to the Closing Date. The remaining $117.6 million of proceeds was retained by TRI Pointe and used for general corporate purposes.

The 2019 Notes and the 2024 Notes mature on June 15, 2019 and June 15, 2024, respectively. Interest is payable semiannually in arrears on June 15 and December 15. As of September 30, 2014, no principal has been paid on the Senior Notes, and there was $24.7 million of capitalized debt financing costs, included in other assets on our consolidated balance sheet, related to the Senior Notes that will amortize over the lives of the Senior Notes. Accrued interest related to the Senior Notes was $13.5 million as of September 30, 2014.

Notes Payable and Other Borrowings

Notes payable and other borrowings consisted of the following (in thousands):

 

     September 30,      December 31,  
     2014      2013  

Unsecured revolving credit facility

   $ 260,000       $ —     

Seller financed loan

     17,128         —     

Debt payable to Weyerhaeuser

     —           834,589   
  

 

 

    

 

 

 
   $ 277,128       $ 834,589   
  

 

 

    

 

 

 

Unsecured Revolving Credit Facility

In June 2014, the Company entered into an unsecured $425 million revolving credit facility (the “Facility”) with various lenders, with one lender serving as the administrative agent for the Facility. The Facility matures on July 1, 2018, and contains a sublimit of $75 million for letters of credit. The Company may borrow under the Facility in the ordinary course of business to fund its operations, including its land development and homebuilding activities. Borrowings under the Facility will be governed by, among other things, a borrowing base. Interest rates on borrowings under the Facility will be based on either a daily Eurocurrency base rate or a Eurocurrency rate, in either case, plus a spread ranging from 2.15% to 2.85%, depending on the Company’s leverage ratio. As of September 30, 2014, the outstanding balance under the Facility was $260 million with an interest rate of 2.71% per annum and $159 million of availability after considering the borrowing base provisions and outstanding letters of credit. Accrued interest related to the Facility was $921,000 as of September 30, 2014.

Seller Financed Loan

In May 2014, the Company entered into a seller financed loan to acquire lots for the construction of homes from an unrelated third party. Principal and interest payments on this loan are due and payable as individual homes associated with the acquired land are delivered, with any remaining unpaid balance due in May 2016. As of September 30, 2014, the Company had $17.1 million outstanding related to this seller financed loan. The seller financed loan accrues interest at a rate of 7.00% per annum, with interest calculated on a daily basis. Accrued interest related to this loan was $330,000 as of September 30, 2014.

Debt Payable to Weyerhaeuser

WRECO had a revolving promissory note payable to Weyerhaeuser prior to the Closing Date on July 7, 2014. This note payable was settled at the close of the Merger. WRECO paid interest on the unpaid balance of the principal at a per annum rate of LIBOR plus 1.70%. See Note 18, Related Party Transactions, for further details.

 

Interest Incurred

During the three months ended September 30, 2014 and 2013, the Company incurred interest of $15.1 million and $5.7 million, respectively, related to all notes payable, Senior Notes and debt payable to Weyerhaeuser outstanding during the period. Of the interest incurred, $14.8 million and $4.9 million was capitalized to inventory for the three months ended September 30, 2014 and 2013, respectively. During the nine months ended September 30, 2014 and 2013, the Company incurred interest of $25.7 million and $16.3 million, respectively, related to all notes payable, Senior Notes and debt payable to Weyerhaeuser outstanding during the period. Of the interest incurred, $23.0 million and $14.1 million was capitalized to inventory for the nine months ended September 30, 2014 and 2013, respectively. Included in interest incurred was amortization of deferred financing and senior note discount costs of $1.0 million for the three months ended September 30, 2014 and none for the three months ended September 30, 2013. Included in interest incurred was amortization of deferred financing costs and senior note discount of $1.1 million for the nine months ended September 30, 2014 and none for the nine months ended September 30, 2013. Accrued interest related to all outstanding debt at September 30, 2014 was $14.7 million. Accrued interest related to the debt payable with Weyerhaeuser was $4.3 million as of September 30, 2013.

Covenant Requirements

The Senior Notes contain covenants that restrict our ability to, among other things, create liens or other encumbrances, enter into sale and leaseback transactions, or merge or sell all or substantially all of our assets. These limitations are subject to a number of qualifications and exceptions.

Under the Facility, the Company is required to comply with certain financial covenants, including but not limited to (i) a minimum consolidated tangible net worth; (ii) a maximum total leverage ratio; and (iii) a minimum interest coverage ratio.

The Company was in compliance with all applicable financial covenants as of September 30, 2014 and December 31, 2013.

Fair Value Disclosures
Fair Value Disclosures
14. Fair Value Disclosures

Fair Value Measurements

ASC Topic 820, Fair Value Measurements and Disclosures, defines “fair value” as the price that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date and requires assets and liabilities carried at fair value to be classified and disclosed in the following three categories:

 

    Level 1—Quoted prices for identical instruments in active markets

 

    Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at measurement date

 

    Level 3—Valuations derived from techniques where one or more significant inputs or significant value drivers are unobservable in active markets at measurement date

Fair Value of Financial Instruments

The following table presents net book values and estimated fair values of our financial instruments (in thousands):

 

            September 30, 2014      December 31, 2013  
     Hierarchy      Book Value      Fair Value      Book Value      Fair Value  

Receivables

     Level 3       $ 26,943       $ 26,943       $ 60,397       $ 60,390   

Senior notes

     Level 2         887,130         885,375         —           —     

Notes payable and other borrowings

     Level 3         277,128         277,128         —           —     

The estimated fair value of our receivables was based on the discounted value of the expected future cash flows using current rates for similar receivables. The book value of our receivables equaled the fair value as of September 30, 2014 due to the short-term nature of the remaining receivables. The estimated fair value of our Senior Notes is based on quoted market prices. The estimated fair value of our notes payable and other borrowings was based on comparing current interest rates for similar instruments. Since our notes payable and other borrowings were recently entered into, the book value approximately equaled the fair value as of September 30, 2014.

 

Fair Value of Nonfinancial Assets and Liabilities

Nonfinancial assets and liabilities include items such as real estate inventories and long-lived assets that are measured at fair value on a nonrecurring basis with events and circumstances indicating the carrying value is not recoverable. The following table presents impairment charges and the remaining net fair value for nonfinancial assets that were measured during the periods presented (in thousands):

 

            September 30, 2014      December 31, 2013  
                   Fair Value             Fair Value  
            Impairment      Net of      Impairment      Net of  
     Hierarchy      Charge      Impairment      Charge      Impairment  

Real estate inventories

     Level 3       $ 300       $ 8,360       $ 341,086       $ 21,528   

The homebuilding impairment charge as of December 31, 2013 was primarily related to the impairment of Coyote Springs. Under the terms of the Transaction Agreement, certain assets and liabilities of WRECO and its subsidiaries were excluded from the transaction and retained by Weyerhaeuser, including assets and liabilities relating to Coyote Springs. Consequently, WRECO recognized a $340.3 million impairment charge in the fourth quarter of 2013 for the impairment of Coyote Springs inventory. In addition, WRECO wrote off $3.0 million of option deposits and pre-acquisition costs related to Coyote Springs.

Commitments and Contingencies
Commitments and Contingencies
15. Commitments and Contingencies

Legal Matters

Lawsuits, claims and proceedings have been and may be instituted or asserted against us in the normal course of business, including actions brought on behalf of various classes of claimants. We are also subject to local, state and federal laws and regulations related to land development activities, house construction standards, sales practices, employment practices and environmental protection. As a result, we are subject to periodic examinations or inquiry by agencies administering these laws and regulations.

We record a reserve for potential legal claims and regulatory matters when they are probable of occurring and a potential loss is reasonably estimable. We accrue for these matters based on facts and circumstances specific to each matter and revise these estimates when necessary.

In view of the inherent difficulty of predicting outcomes of legal claims and related contingencies, we generally cannot predict their ultimate resolution, related timing or eventual loss. If our evaluations indicate loss contingencies that could be material are not probable, but are reasonably possible, we will disclose their nature with an estimate of a possible range of losses or a statement that such loss is not reasonably estimable.

Warranty

Warranty reserves are accrued as home deliveries occur. Our warranty reserves on homes delivered will vary based on product type and geographic area and also depending on state and local laws. The warranty reserve is included in accrued expenses and other liabilities on our consolidated balance sheets and represents expected future costs based on our historical experience over previous years. Estimated warranty costs are charged to cost of home sales in the period in which the related home sales revenue is recognized.

We maintain general liability insurance designed to protect us against a portion of our risk of loss from construction-related claims. We also generally require our subcontractors and design professionals to indemnify us for liabilities arising from their work, subject to various limitations. However, such indemnity is significantly limited with respect to certain subcontractors that are added to our general liability insurance policy. We record expected recoveries from insurance carriers when proceeds are probable and estimable. Outstanding warranty insurance receivables were $10.8 million and $12.5 million as of September 30, 2014 and December 31, 2013, respectively. Warranty insurance receivables are recorded in receivables on the accompanying consolidated balance sheet.

There can be no assurance that the terms and limitations of the limited warranty will be effective against claims made by homebuyers, that we will be able to renew our insurance coverage or renew it at reasonable rates, that we will not be liable for damages, cost of repairs, and/or the expense of litigation surrounding possible construction defects, soil subsidence or building related claims or that claims will not arise out of uninsurable events or circumstances not covered by insurance and not subject to effective indemnification agreements with certain subcontractors.

 

Warranty reserves consisted of the following (in thousands):

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  

Warranty reserves, beginning of period

   $ 24,324      $ 23,921      $ 24,449      $ 24,485   

Warranty reserves accrued

     3,691        1,915        7,455        6,283   

Liabilities assumed in the Merger

     7,481        —          7,481        —     

Adjustments to pre-existing reserves

     (809     406        209        595   

Warranty expenditures

     (2,596     (2,246     (7,503     (7,367
  

 

 

   

 

 

   

 

 

   

 

 

 

Warranty reserves, end of period

   $ 32,091      $ 23,996      $ 32,091      $ 23,996   
  

 

 

   

 

 

   

 

 

   

 

 

 

Performance Bonds

We obtain surety bonds in the normal course of business to ensure completion of certain infrastructure improvements of our projects. As of September 30, 2014 and December 31, 2013, the Company had outstanding surety bonds totaling $342.6 million and $280.6 million, respectively. The beneficiaries of the bonds are various municipalities.

Stock-Based Compensation
Stock-Based Compensation
16. Stock-Based Compensation

2013 Long-Term Incentive Plan

The Company’s stock compensation plan, the 2013 Long-Term Incentive Plan (the “2013 Incentive Plan”), was adopted by our board of directors in January 2013 and amended with the approval of our stockholders in 2014. The 2013 Incentive Plan provides for the grant of equity-based awards, including options to purchase shares of common stock, stock appreciation rights, common stock, restricted stock, restricted stock units and performance awards. The 2013 Incentive Plan will automatically expire on the tenth anniversary of its effective date. Our board of directors may terminate or amend the 2013 Incentive Plan at any time, subject to any requirement of stockholder approval required by applicable law, rule or regulation.

As amended, the number of shares of our common stock that may be issued under the 2013 Incentive Plan is 11,727,833 shares. To the extent that shares of our common stock subject to an outstanding option, stock appreciation right, stock award or performance award granted under the 2013 Incentive Plan are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or the settlement of such award in cash, then such shares of our common stock generally shall again be available under the 2013 Incentive Plan. As of September 30, 2014 there were 10,886,069 shares available for future grant under the 2013 Incentive Plan.

Converted Awards

Under the Transaction Agreement, each outstanding Weyerhaeuser equity award held by an employee of WRECO was converted into a similar equity award with TRI Pointe, based on the final exchange ratio of 2.1107 (the “Exchange Ratio”), rounded down to the nearest whole number of shares of common stock. The Company filed a Form S-8 (Registration No. 333-197461) on July 16, 2014 to register 4,105,953 shares related to these equity awards. The converted awards have the same terms and conditions as the Weyerhaeuser equity awards except that all performance share units were surrendered in exchange for time-vesting restricted stock units without any performance-based vesting conditions or requirements and the exercise price of each converted stock option is equal to the original exercise price divided by the Exchange Ratio. There will be no future grants under the WRECO equity incentive plans. Refer to TRI Pointe’s Registration Statement on Form S-4, as amended (Registration No. 333-193248), for additional information on the Merger, the option exchange ratio and the treatment of equity awards under the Transaction Agreement.

 

The following table presents compensation expense recognized related to all stock-based awards (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  

Total stock-based compensation

   $ 3,547       $ 1,283       $ 6,250       $ 3,704   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2014, total unrecognized stock-based compensation related to all stock-based awards was $20.6 million and the weighted average term over which the expense was expected to be recognized was 2.18 years.

Summary of Stock Option Activity

The following table presents a summary of stock option awards for the nine months ended September 30, 2014:

 

     Nine Months Ended September 30, 2014  
           Weighted      Weighted         
           Average      Average      Aggregate  
           Exercise      Remaining      Intrinsic  
           Price      Contractual      Value  
     Options     Per Share      Life      (in 000’s)  

Options outstanding at December 31, 2013(1)

     285,900      $ 17.04         9.1       $ 827   

Granted

     154,598        16.17         9.5         —     

Assumed in the Merger

     3,379,275        12.62         6.2         3,925   

Exercised

     —             

Forfeited

     (185,159     13.81         
  

 

 

         

Options outstanding at September 30, 2014

     3,634,614        13.07         6.4      
  

 

 

         

Options exercisable at September 30, 2014

     1,828,232        12.26         4.2      
  

 

 

         

 

(1) Options outstanding at December 31, 2013 reflect outstanding options for the legal acquirer, TRI Pointe.

As discussed above, on July 7, 2014, the Company assumed an aggregate of 3,379,275 stock options, along with 726,678 restricted stock units discussed below, as a result of the Merger. The stock option awards assumed generally vest ratably over four years of continuous service and have a 10-year contractual term. Award provisions for awards granted in 2014, 2013, 2012 and 2011 at WRECO require an accelerated vesting schedule in the event of retirement eligibility or involuntary termination and will generally vest upon retirement for employees who retire at age 62 or older, but stop vesting for other voluntary terminations, including early retirement prior to age 62. The share-based compensation expense for individuals meeting the retirement eligibility requirements is recognized over a required service period that is less than the stated four-year vesting period.

Under ASC 805, for share-based payment awards held by employees of the accounting acquirer (WRECO), the legal exchange of the accounting acquirer awards for the legal acquirer (TRI Pointe) awards is considered, from an accounting perspective, to be a modification of the accounting acquirer’s outstanding awards. The modification was accounted for pursuant to ASC 718. The modification resulted in incremental stock-based compensation for the three months ended September 30, 2014, of $722,000.

The fair value of stock option awards assumed in the Merger was determined by using an option-based model with the following assumptions:

 

     2014 Grants     2013 Grants     2012 Grants     2011 Grants  

Dividend yield

     0.00     0.00     0.00     0.00

Expected volatility

     48.99     47.88     43.69     41.58

Risk-free interest rate

     1.97     1.97     1.73     1.73

Expected life (in years)

     6.05        5.81        5.55        5.30   

Expected volatility assumptions for all stock options are based on the historical volatility of similar companies’ stock prices from a trailing period equal to the expected life of the stock option and ending on the date of grant or date assumed. Historical data from TRI Pointe were used to estimate option exercise and employee terminations within the valuation model of all stock options and the risk-free rate for all stock options is based on the United States Treasury yield curve over a period matching the expected term of each option.

Summary of Restricted Stock Unit Activity

The following table presents a summary of restricted stock units (“RSUs”) for the nine months ended September 30, 2014:

 

     Nine Months Ended September 30, 2014  
           Weighted         
           Average      Aggregate  
     Restricted     Grant Date      Intrinsic  
     Stock     Fair Value      Value  
     Units     Per Share      (in 000’s)  

Nonvested RSUs at December 31, 2013(1)

     145,517      $ 17.68       $ 2,900   

Granted

     274,287        15.59         3,549   

Assumed in the Merger

     726,678        15.74         9,403   

Vested

     (57,811     17.63      

Forfeited

     (139,116     15.85      
  

 

 

      

Nonvested RSUs at September 30, 2014

     949,555        15.87         12,287   
  

 

 

      

 

(1) Nonvested RSUs at December 31, 2013 reflect nonvested RSUs for the legal acquirer, TRI Pointe.

As discussed above, on July 7, 2014, the Company assumed an aggregate of 726,678 restricted stock units, along with 3,379,275 stock options, as a result of the Merger. Restricted stock units assumed in the Merger generally vest ratably over four years of continuous service. Award provisions require an accelerated vesting schedule in the event of retirement eligibility or involuntary termination. The share-based compensation expense for individuals meeting the retirement eligibility requirements is recognized over a required service period that is less than the stated four-year vesting period. There was no incremental expense resulting from the modification of the RSU awards on July 7, 2014 because the fair value before and after the modification was the same.

On April 7, 2014, the Company granted an aggregate of 217,839 restricted stock units to employees, officers and directors. The restricted stock units granted to employees and officers on April 7, 2014 ratably vest annually on the anniversary of the grant date over a three year period. The restricted stock units granted to directors on April 7, 2014 vest on January 31, 2015, except the restricted stock units granted to directors who left the board upon the closing of the Merger vested on the date they left the board based on the number of days served in 2014. The fair value of each restricted stock award granted on April 7, 2014 was measured using a price of $16.17 per share, which was the closing stock price on the date of grant. Each award will be expensed on a straight-line basis over the vesting period.

On August 5, 2014, the Company granted an aggregate of 56,448 restricted stock units to members of its board of directors. The restricted stock units granted to directors on August 5, 2014 vest in their entirety on May 1, 2015. The fair value of each restricted stock award granted on August 5, 2014 was measured using $13.34 per share, which was the closing stock price on the date of grant. Each award will be expensed on a straight-line basis over the vesting period.

As restricted stock units vest, a portion of the shares awarded is generally withheld to cover employee taxes. As a result, the number of restricted stock units vested and the number of shares of TRI Pointe common stock issued will differ.

Summary of Equity-Based Incentive Units

On September 24, 2010, the Company granted equity-based incentive units to management. In connection with the initial public offering of TRI Pointe Homes in January 2013, the incentive units converted into shares of common stock. The recipients of the equity-based incentive units have all the rights of a stockholder, including the rights to vote those shares and receive any dividends or distributions made with respect to those shares and any shares or other property received in respect of those shares; provided, however, any non-cash dividend or distribution with respect to the common stock shall be subject to the same vesting provisions as the incentive units. The vesting terms of the equity-based incentive units are as follows: (1) 18.75% of such units vest, subject to the limitation in (3) below on the date following the first-year anniversary of the date of such officer’s employment; (2) 56.25% of such units vest, subject to the limitation in (3) below in equal quarterly installments between the first-and fourth-year anniversary of the date of such officer’s employment; (3) 25% of the awards granted in (1) and (2) will vest upon a liquidity event, as defined in each such recipient’s employment agreement; and (4) 25% of such units will be converted into a number of shares of restricted stock prior to a liquidity event. The grant-date fair value of the equity-based incentive units granted during the period ended December 31, 2010 was $3.3 million. The Company did not grant any equity-based incentive units and no equity-based incentive units were forfeited during the nine months ended September 30, 2014. The Merger constituted a “liquidity event” as defined in each recipient’s employment agreement. As a result, 25% of the equity-based incentive units vested on the Closing Date. Refer to Note 2, Merger with Weyerhaeuser Real Estate Company, for a description of the Merger. As of September 30, 2014, there was no unrecognized stock-based compensation related to equity-based incentive units.

Income Taxes
Income Taxes
17. Income Taxes

The Company accounts for income taxes in accordance with ASC 740, which requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statements and tax bases of assets and liabilities using enacted tax rates for the years in which taxes are expected to be paid or recovered. Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is not “more likely than not” realizable under ASC 740. We are required to establish a valuation allowance for any portion of the asset we conclude is not “more likely than not” to be realizable. Our assessment considers, among other things, the nature, frequency and severity of our current and cumulative losses, forecasts of our future taxable income, the duration of statutory carryforward periods and tax planning alternatives.

We had net deferred tax assets of $141.6 million and $289.0 million as of September 30, 2014 and December 31, 2013, respectively. We had a valuation allowance related to those net deferred tax assets of approximately $9.0 million and $8.3 million as of September 30, 2014 and December 31, 2013, respectively. The Company will continue to evaluate both positive and negative evidence in determining the need for a valuation allowance against its deferred tax assets. Changes in positive and negative evidence, including differences between the Company’s future operating results and the estimates utilized in the determination of the valuation allowance, could result in changes in the Company’s estimate of the valuation allowance against its deferred tax assets. The accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on the Company’s consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation allowance against the Company’s deferred tax assets.

Our provision for income taxes totaled $6.0 million and $11.6 million for the three months ended September 30, 2014 and 2013, respectively. Our income tax provision totaled $16.4 million and $15.7 million for the nine months ended September 30, 2014 and 2013, respectively. The Company classifies any interest and penalties related to income taxes assessed by jurisdiction as part of income tax expense. The Company has concluded that there were no significant uncertain tax positions requiring recognition in its financial statements, nor has the Company been assessed interest or penalties by any major tax jurisdictions related to prior years.

Prior to the Merger, WRECO was included in the Weyerhaeuser NR Company consolidated federal income tax return and certain state income tax filings. Income taxes were allocated using the pro rata method, which means our tax provisions and resulting income tax receivable from or payable to Weyerhaeuser NR Company represent the income tax amounts allocated to us on pro rata share method based upon our actual results. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards which exist for Weyerhaeuser NR Company and are attributable to our operations.

If we were to calculate income taxes using the separate return method, the effect on pro forma income from continuing operations and pro forma earnings per share would be as follows (in thousands, except per share amounts):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Income from continuing operations before income tax as reported in the accompanying financial statements

   $ 16,986     

$

31,530

  

  $ 59,123      $ 44,059   

Provision for income taxes assuming computation on a separate return basis

     (6,021     (11,589     (22,138     (15,732
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma income from continuing operations

   $ 10,965      $ 19,941      $ 36,985      $ 28,327   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma earnings per share - basic

   $ 0.07      $ 0.15      $ 0.27      $ 0.22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma earnings per share - diluted

   $ 0.07      $ 0.15      $ 0.26      $ 0.22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Assuming computation on a separate return basis, there would be no change to our income tax provision for the three months ended September 30, 2014 and 2013 and for the nine months ended September 30, 2013. For the nine months ended September 30, 2014, our income tax provision would have increased by $5.8 million related to the tax loss on the sale of Weyerhaeuser Realty Investors, Inc. to Weyerhaeuser NR Company that would not have provided a benefit to our income tax provision assuming computation on a separate return basis.

Refer to Note 18, Related Party Transactions, for a description of the tax sharing agreement between TRI Pointe and Weyerhaeuser.

Related Party Transactions
Related Party Transactions
18. Related Party Transactions

Prior to the Merger, WRECO was a wholly owned subsidiary of Weyerhaeuser. Weyerhaeuser provided certain services including payroll processing and related employee benefits, other corporate services such as corporate governance, cash management and other treasury services, administrative services such as government relations, tax, internal audit, legal, accounting, human resources and equity-based compensation plan administration, lease of office space, aviation services and insurance coverage. WRECO was allocated a portion of Weyerhaeuser corporate general and administrative costs on either a proportional cost or usage basis.

Weyerhaeuser-allocated corporate general and administrative expenses were as follows (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  

Weyerhaeuser-allocated costs

   $ —         $ 6,292       $ 10,735       $ 17,966   

These expenses may not be indicative of the actual level of expense WRECO would have incurred if it had operated as an independent company or of expenses expected to be incurred in the future after the Closing Date.

During the nine months ended September 30, 2014 and prior to the Merger, WRECO sold $4.8 million of mineral rights and $21.2 million of land to Weyerhaeuser.

 

As of December 31, 2013, there were balances owed to Weyerhaeuser including accounts payable to Weyerhaeuser of $18.9 million, which is recorded in accounts payable on the accompanying consolidated balance sheet, $16.6 million of income tax liability to Weyerhaeuser, which is recorded in accrued expenses and other liabilities on the accompanying balance sheet and $834.6 million of debt payable to Weyerhaeuser, which is recorded on the face of the accompanying balance sheet. All amounts owed to Weyerhaeuser were settled on the Closing Date in connection with the Merger.

TRI Pointe has certain liabilities with Weyerhaeuser related to a tax sharing agreement. As of September 30, 2014, we had an income tax liability to Weyerhaeuser of $15.7 million which is recorded in accrued expenses and other liabilities on the accompanying balance sheet.

Discontinued Operations
Discontinued Operations
19. Discontinued Operations

On October 31, 2013, a wholly owned subsidiary of WRECO, Weyerhaeuser Realty Investors, Inc., (“WRI”), was sold to Weyerhaeuser NR Company. The assets, liabilities and results of operations for WRI have been recorded as discontinued operations in the accompanying consolidated financial statements. Cash flows of WRI remain fully consolidated in the accompanying consolidated statement of cash flow for the nine months ended September 30, 2013.

Earnings of discontinued operations is as follows (in thousands):

 

     Nine Months Ended
September 30,
 
     2014      2013  

Earnings before income taxes

   $ —         $ 597   

Provision for income taxes

     —           (213
  

 

 

    

 

 

 

Discontinued operations, net of income taxes

   $ —         $ 384   
  

 

 

    

 

 

 

On October 31, 2013, Weyerhaeuser NR Company acquired WRI for $3.6 million, which represented the estimated fair value of WRI based on a discounted cash flow analysis. The purchase price was recorded as a reduction in the debt payable to Weyerhaeuser. The transaction resulted in a net gain of approximately $1.9 million, which was recognized in the fourth quarter of 2013.

Supplemental Disclosure to Consolidated Statements of Cash Flow
Supplemental Disclosure to Consolidated Statements of Cash Flow
20. Supplemental Disclosure to Consolidated Statements of Cash Flow

The following are supplemental disclosures to the consolidated statements of cash flows (in thousands):

 

     Nine Months Ended
September 30,
 
     2014     2013  

Supplemental disclosure of cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 15,337      $ 15,384   

Income taxes

   $ 14,962      $ 1,313   

Supplemental disclosures of noncash activities:

    

Increase in real estate inventory due to distribution of land from an unconsolidated joint venture

   $ 5,132      $ —     

Distribution to Weyerhaeuser of excluded assets and liabilities

   $ 125,019      $ —     

Amounts owed to Weyerhaeuser related to the tax sharing agreement

   $ 15,688      $ —     

Noncash settlement of debt payable to Weyerhaeuser

   $ 70,082      $ —     

Effect of net consolidation and de-consolidation of variable interest entities:

    

Increase in consolidated real estate inventory not owned

   $ 4,497      $ 1,137   

Increase in debt held by variable interest entities

   $ —        $ (4,056

Increase in accrued expenses and other liabilities

   $ —        $ (838

(Increase) decrease in noncontrolling interests

   $ (4,497   $ 3,757   

Acquisition of TRI Pointe (Note 2):

    

Fair value of assets, excluding cash acquired

   $ 728,403      $ —     

Liabilities assumed

   $ 279,755      $ —     
Organization, Basis of Presentation and Summary of Significant Accounting Policies (Policies)

Organization

TRI Pointe Homes, Inc. is engaged in the design, construction and sale of innovative single-family homes through its portfolio of six quality brands across eight states, including Maracay Homes in Arizona, Pardee Homes in California and Nevada, Quadrant Homes in Washington, Trendmaker Homes in Texas, TRI Pointe Homes in California and Colorado and Winchester homes in Maryland and Virginia. Unless the context herein otherwise requires, the terms “we,” “us,” “our,” “TRI Pointe” and “the Company” refer to TRI Pointe Homes, Inc. and its consolidated subsidiaries.

Basis of Presentation

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted.

In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly our consolidated financial position as of September 30, 2014, the results of our consolidated operations for the three and nine months ended September 30, 2014 and 2013, and our consolidated cash flows for the nine months ended September 30, 2014 and 2013. The results of our consolidated operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year due to the merger described below under “Reverse Acquisition” as well as seasonal variations in operating results and other factors. The consolidated balance sheet at December 31, 2013 has been taken from the audited consolidated financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2013, which are contained in our Annual Report on Form 10-K for that period and the audited consolidated financial statements of Weyerhaeuser Real Estate Company for the year ended December 31, 2013, which are contained in our proxy statement for our 2014 Annual Meeting of Stockholders.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries as described in “Reverse Acquisition” below. All significant intercompany accounts have been eliminated upon consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. Subsequent events have been evaluated through the date the financial statements were issued.

Reverse Acquisition

On July 7, 2014 (the “Closing Date”), TRI Pointe consummated the previously announced merger (the “Merger”) of our wholly owned subsidiary, Topaz Acquisition, Inc. (“Merger Sub”), with and into Weyerhaeuser Real Estate Company (“WRECO”), with WRECO surviving the Merger and becoming our wholly owned subsidiary, as contemplated by the Transaction Agreement, dated as of November 3, 2013 (the “Transaction Agreement”), by and among us, Weyerhaeuser Company (“Weyerhaeuser”), the Company, WRECO and Merger Sub. The Merger is accounted for in accordance with ASC Topic 805, Business Combinations (“ASC 805”). For accounting purposes, the Merger is treated as a “reverse acquisition” and WRECO is considered the accounting acquirer. Accordingly, WRECO is reflected as the predecessor and acquirer and therefore the accompanying consolidated financial statements reflect the historical consolidated financial statements of WRECO for all periods presented and do not include the historical financial statements of TRI Pointe prior to the Closing Date. Subsequent to the Closing Date, the consolidated financial statements reflect the results of the combined company. See Note 2, Merger with Weyerhaeuser Real Estate Company, for further information on the Merger. In the Merger, each issued and outstanding WRECO common share was converted into 1.297 shares of TRI Pointe common stock. The historical issued and outstanding WRECO common shares have been recast in all periods presented to reflect this conversion.

Use of Estimates

Our financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of costs and expenses during the reporting period. On an ongoing basis, our management evaluates its estimates and judgments. Our management bases its estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from our estimates.

Cash and Cash Equivalents and Concentration of Credit Risk

We define cash and cash equivalents as cash on hand, demand deposits with financial institutions, and short-term liquid investments with an initial maturity date of less than three months. The Company’s cash balances exceed federally insurable limits. The Company monitors the cash balances in its operating accounts and adjusts the cash balances as appropriate; however, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, the Company has experienced no loss or lack of access to cash in its operating accounts.

Real Estate Inventories and Cost of Sales

We capitalize pre-acquisition, land, development and other allocated costs, including interest, during development and home construction. Applicable costs incurred after development or construction is substantially complete are charged to selling, general and administrative, and other expenses as appropriate. Pre-acquisition costs, including non-refundable land deposits, are expensed to cost of home sales when we determine continuation of the respective project is not probable. In accordance with ASC Topic 835, Interest (“ASC 835”), interest capitalized as a cost of inventories owned is included in cost of sales as related units or lots are sold. To the extent our debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the interest incurred by us. Qualified assets represent projects that are actively under development.

Land, development and other common costs are typically allocated to inventory using a methodology that approximates the relative-sales-value method. Home construction costs per production phase are recorded using the specific identification method. Cost of sales for homes closed includes the allocation of construction costs of each home and all applicable land acquisition, land development and related common costs (both incurred and estimated to be incurred) based upon the relative-sales-value of the home within each community. Changes to estimated total development costs subsequent to initial home closings in a community are generally allocated on a relative-sales-value method to remaining homes in the community. Inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is written down to fair value. We review our real estate assets in each community for indicators of impairment. Real estate assets include projects actively selling and projects under development or held for future development. Indicators of impairment include, but are not limited to, decreases in local housing market values and selling prices of comparable homes, decreases in gross margins and sales absorption rates, costs in excess of budget, and actual or projected cash flow losses.

If there are indications of impairment, we perform a detailed budget and cash flow review of the applicable community to determine whether the estimated remaining undiscounted future cash flows of the community are more or less than the asset’s carrying value. If the undiscounted cash flows are more than the asset’s carrying value, no impairment adjustment is required. However, if the undiscounted cash flows are less than the asset’s carrying value, the asset is deemed impaired and is written down to fair value. These impairment evaluations require us to make estimates and assumptions regarding future conditions, including timing and amounts of development costs and sales prices of real estate assets, to determine if expected future undiscounted cash flows will be sufficient to recover the asset’s carrying value.

When estimating undiscounted cash flows of a community, we make various assumptions, including: (i) expected sales prices and sales incentives to be offered, including the number of homes available, pricing and incentives being offered by us or other builders in other communities, and future sales price adjustments based on market and economic trends; (ii) expected sales pace and cancellation rates based on local housing market conditions, competition and historical trends; (iii) costs expended to date and expected to be incurred including, but not limited to, land and land development costs, home construction costs, interest costs, indirect construction and overhead costs, and selling and marketing costs; (iv) alternative product offerings that may be offered which could have an impact on sales pace, sales price and/or building costs; and (v) alternative uses for the property.

 

Many assumptions are interdependent and a change in one may require a corresponding change to other assumptions. For example, increasing or decreasing sales absorption rates has a direct impact on the estimated per unit sales price of a home, the level of time-sensitive costs (such as indirect construction, overhead and carrying costs), and selling and marketing costs (such as model maintenance costs and advertising costs). Depending on the underlying objective of the community, assumptions could have a significant impact on the projected cash flow analysis. For example, if our objective is to preserve operating margins, our cash flow analysis will be different than if the objective is to increase sales. These objectives may vary significantly from community to community and over time. If an asset is considered impaired, impairment is determined by the amount the asset’s carrying value exceeds its fair value. Fair value is determined based on estimated future cash flows discounted for inherent risks associated with real estate assets. These discounted cash flows are impacted by expected risk based on estimated land development, construction and delivery timelines, market risk of price erosion, uncertainty of development or construction cost increases; and other risks specific to the asset or market conditions where the asset is located when assessment is made. These factors are specific to each community and may vary among communities.

Revenue Recognition

In accordance with ASC Topic 360, Property, Plant, and Equipment, revenues from home sales and other real estate sales are recorded and a profit is recognized when the respective units are delivered. Home sales and other real estate sales are closed when all conditions of escrow are met, including delivery of the home or other real estate asset, title passage, appropriate consideration is received and collection of associated receivables, if any, is reasonably assured. Sales incentives are a reduction of revenues when the respective unit is closed. When it is determined that the earnings process is not complete, the sale and the related profit are deferred for recognition in future periods. The profit we record is based on the calculation of cost of sales, which is dependent on our allocation of costs, as described in more detail above in the section entitled “—Real Estate Inventories and Cost of Sales.”

Warranty Reserves

Estimated future direct warranty costs are accrued and charged to cost of home sales in the period when the related home sales revenues are recognized. Amounts accrued are based upon historical experience rates. We also consider historical experience of our peers. Indirect warranty overhead salaries and related costs are charged to the reserve in the period incurred. We assess the adequacy of our warranty accrual on a quarterly basis and adjust the amounts recorded if necessary. Our warranty accrual is included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.

Investments in Unconsolidated Entities

We have investments in unconsolidated entities over which we have significant influence that we account for using the equity method with taxes provided on undistributed earnings. We record earnings and accrue taxes in the period that the earnings are recorded by our affiliates. Under the equity method, our share of the unconsolidated entities’ earnings or loss is included in equity in income of unconsolidated entities in the accompanying consolidated statement of operations. We evaluate our investments in unconsolidated entities for impairment when events and circumstances indicate that the carrying value of the investment may not be recoverable.

Variable Interest Entities

The Company accounts for variable interest entities in accordance with ASC Topic 810, Consolidation (“ASC 810”). Under ASC 810, a variable interest entity (“VIE”) is created when: (a) the equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties, including the equity holders; (b) the entity’s equity holders as a group (i) lack the direct or indirect ability to make decisions about the entity, (ii) are not obligated to absorb expected losses of the entity or (iii) do not have the right to receive expected residual returns of the entity; or (c) the entity’s equity holders have voting rights that are not proportionate to their economic interests, and the activities of the entity involve, or are conducted on behalf of, the equity holder with disproportionately few voting rights. If an entity is deemed to be a VIE pursuant to ASC 810, the enterprise that has both (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb the expected losses of the entity or right to receive benefits from the entity that could be potentially significant to the VIE is considered the primary beneficiary and must consolidate the VIE.

Under ASC 810, a non-refundable deposit paid to an entity is deemed to be a variable interest that will absorb some or all of the entity’s expected losses if they occur. Our land purchase and lot option deposits generally represent our maximum exposure to the land seller if we elect not to purchase the optioned property. In some instances, we may also expend funds for due diligence, development and construction activities with respect to optioned land prior to takedown. Such costs are classified as inventories owned, which we would have to write off should we not exercise the option. Therefore, whenever we enter into a land option or purchase contract with an entity and make a non-refundable deposit, a VIE may have been created. In accordance with ASC 810, we perform ongoing reassessments of whether we are the primary beneficiary of a VIE.

Stock-Based Compensation

We account for share-based awards in accordance with ASC Topic 718, Compensation-Stock Compensation (“ASC 718”). ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. ASC 718 requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees.

Sales and Marketing Expense

Sales and marketing costs incurred to sell real estate projects are capitalized if they are reasonably expected to be recovered from the sale of the project or from incidental operations and are incurred for tangible assets that are used directly through the selling period to aid in the sale of the project or services that have been performed to obtain regulatory approval of sales. All other selling expenses and other marketing costs are expensed in the period incurred.

Income Taxes

Income taxes are accounted for in accordance with ASC Topic 740, Income Taxes (“ASC 740”). The provision for, or benefit from, income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are evaluated on a quarterly basis to determine if adjustments to the valuation allowance are required. In accordance with ASC 740, we assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. The ultimate realization of deferred tax assets depends primarily on the generation of future taxable income during the periods in which the differences become deductible. The value of our deferred tax assets will depend on applicable income tax rates. Judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial statements.

ASC 740 defines the methodology for recognizing the benefits of uncertain tax return positions as well as guidance regarding the measurement of the resulting tax benefits. These provisions require an enterprise to recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. In addition, these provisions provide guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The evaluation of whether a tax position meets the more-likely-than-not recognition threshold requires a substantial degree of judgment by management based on the individual facts and circumstances. Actual results could differ from estimates.

Recently Issued Accounting Standards

In April 2014, the FASB issued amendments to Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The update requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. The amendments are effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014 (early adoption is permitted only for disposals that have not been previously reported). The implementation of the amended guidance is not expected to have a material impact on our consolidated financial position or results of operations.

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 supersedes the revenue-recognition requirements in ASC Topic 605, Revenue Recognition, most industry-specific guidance throughout the industry topics of the accounting standards codification, and some cost guidance related to construction-type and production-type contracts. ASU 2014-09 is effective for public entities for the annual periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and provide related disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. We believe the adoption of this guidance will not have a material effect on our consolidated financial statements.

In accordance with ASC Topic 280, Segment Reporting, in determining the most appropriate reportable segments, we considered similar economic and other characteristics, including product types, average selling prices, gross profits, production processes, suppliers, subcontractors, regulatory environments, land acquisition results, and underlying demand and supply.

Fair Value Measurements

ASC Topic 820, Fair Value Measurements and Disclosures, defines “fair value” as the price that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date and requires assets and liabilities carried at fair value to be classified and disclosed in the following three categories:

 

    Level 1—Quoted prices for identical instruments in active markets

 

    Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at measurement date

 

    Level 3—Valuations derived from techniques where one or more significant inputs or significant value drivers are unobservable in active markets at measurement date
Merger with Weyerhaeuser Real Estate Company (Tables)

The following table summarizes the calculation of the fair value of the total consideration transferred and the provisional amounts recognized as of the Closing Date (in thousands, except shares and closing stock price):

 

Calculation of consideration transferred

  

TRI Pointe shares outstanding

     31,632,533   

TRI Pointe closing stock price on July 7, 2014

   $ 15.85   
  

 

 

 

Consideration attributable to common stock

   $ 501,376   

Consideration attributable to TRI Pointe equity awards

     1,072   
  

 

 

 

Total consideration transferred

   $ 502,448   
  

 

 

 

Assets acquired and liabilities assumed

  

Cash and cash equivalents

   $ 53,800   

Accounts receivable

     654   

Real estate inventories

     554,038   

Intangible asset

     13,200   

Goodwill

     132,451   

Other assets

     28,060   
  

 

 

 

Total assets acquired

     782,203   
  

 

 

 

Accounts payable

     26,105   

Accrued expenses and other liabilities

     26,522   

Notes payable and other borrowings

     227,128   
  

 

 

 

Total liabilities assumed

     279,755   
  

 

 

 

Total net assets acquired

   $ 502,448   
  

 

 

 

The following represents unaudited pro forma operating results as if the acquisition had been completed as of January 1, 2013 (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  

Total revenues

   $ 479,879       $ 382,407       $ 1,230,722       $ 924,733   

Net income

   $ 21,934       $ 25,192       $ 66,902       $ 30,795   

Earnings per share - basic

   $ 0.14       $ 0.16       $ 0.41       $ 0.19   

Earnings per share - diluted

   $ 0.14       $ 0.16       $ 0.41       $ 0.19   
Restructuring (Tables)

Restructuring costs were comprised of the following (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  

Employee-related costs

   $ 6,817       $ —         $ 8,124       $ 63   

Lease termination costs

     207         384         1,078         3,388   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,024       $ 384       $ 9,202       $ 3,451   
  

 

 

    

 

 

    

 

 

    

 

 

 

Changes in employee-related restructuring reserves were as follows (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014     2013      2014     2013  

Accrued employee-related costs, beginning of period

   $ —        $ —         $ 4,336      $ 28   

Current year charges

     5,550        —           6,857        63   

Payments

     (1,576     —           (7,219     (91
  

 

 

   

 

 

    

 

 

   

 

 

 

Accrued employee-related costs, end of period

   $ 3,974      $ —         $ 3,974      $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Changes in lease termination related restructuring reserves were as follows (in thousands):

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  

Accrued lease termination costs, beginning of period

   $ 2,454      $ 3,637      $ 3,506      $ 2,335   

Current year charges

     207        384        1,078        3,388   

Payments

     (902     (1,129     (2,825     (2,831
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued lease termination costs, end of period

   $ 1,759      $ 2,892      $ 1,759      $ 2,892   
  

 

 

   

 

 

   

 

 

   

 

 

 
Segment Information (Tables)
Summary of Financial Information Relating to Reportable Segments

Operational results of each reportable segment are not necessarily indicative of the results that would have been achieved had the reportable segment been an independent, stand-alone entity during the periods presented.

Total revenues and income from continuing operations before income taxes for each of our reportable segments were as follows (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  

Total revenues

           

Maracay

   $ 37,301       $ 42,391       $ 107,576       $ 81,210   

Pardee

     134,409         129,650         352,118         319,286   

Quadrant

     32,919         29,931         96,958         87,982   

Trendmaker

     69,711         72,243         198,867         193,323   

TRI Pointe

     123,445         —           123,445         —     

Winchester

     80,135         49,653         189,651         105,418   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 477,920       $ 323,868       $ 1,068,615       $ 787,219   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  

Income from continuing operations before taxes

        

Maracay

   $ 2,212      $ 2,496      $ 8,222      $ 2,203   

Pardee

     21,787        25,714        47,580        42,865   

Quadrant

     649        (73     6,889        1,061   

Trendmaker

     7,327        8,052        21,529        20,964   

TRI Pointe

     8,685        —          8,685        —     

Winchester

     6,941        5,663        17,978        6,570   

Corporate(1)

     (30,615     (10,322     (51,760     (29,604
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 16,986      $ 31,530      $ 59,123      $ 44,059   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes $16.7 million and $17.2 million of Merger related transaction costs and $7.0 and $9.2 million of restructuring charges for the three and nine months ended September 30, 2014, respectively.

Total real estate inventories and total assets for each of our reportable segments, as of the date indicated, were as follows (in thousands):

 

     September 30,      December 31,  
     2014      2013  

Real estate inventories

     

Maracay

   $ 152,969       $ 131,380   

Pardee

     929,548         875,618   

Quadrant

     159,989         113,088   

Trendmaker

     157,997         130,973   

TRI Pointe

     596,799         —     

Winchester

     266,438         214,467   
  

 

 

    

 

 

 
   $ 2,263,740       $ 1,465,526   
  

 

 

    

 

 

 
     September 30,      December 31,  
     2014      2013  

Total assets

     

Maracay

   $ 167,567       $ 138,552   

Pardee

     1,079,693         976,262   

Quadrant

     185,880         125,456   

Trendmaker

     176,834         134,628   

TRI Pointe

     597,232         —     

Winchester

     346,404         234,419   

Corporate and Other

     297,786         301,147   
  

 

 

    

 

 

 
   $ 2,851,396       $ 1,910,464   
  

 

 

    

 

 

 
Earnings Per Share (Tables)
Computation of Basic and Diluted Earnings Per Share

The following table sets forth the components used in the computation of basic and diluted earnings per share (in thousands, except share and per share amounts):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2014      2013      2014      2013  

Numerator:

           

Income from continuing operations

   $ 10,965       $ 19,941       $ 42,771       $ 28,327   

Discontinued operations, net of income taxes

     —           218         —           384   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 10,965       $ 20,159       $ 42,771       $ 28,711   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Basic weighted-average shares outstanding

     158,931,450         129,700,000         139,550,891         129,700,000   

Effect of dilutive shares:

           

Stock options and unvested restricted stock units

     227,256         999,408         662,764         1,464,474   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted-average shares outstanding

     159,158,706         130,699,408         140,213,655         131,164,474   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share

           

Basic

           

Continuing operations

   $ 0.07       $ 0.15       $ 0.31       $ 0.22   

Discontinued operations

     —           0.01         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings per share

   $ 0.07       $ 0.16       $ 0.31       $ 0.22   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

           

Continuing operations

   $ 0.07       $ 0.15       $ 0.31       $ 0.22   

Discontinued operations

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings per share

   $ 0.07       $ 0.15       $ 0.31       $ 0.22   
  

 

 

    

 

 

    

 

 

    

 

 

 

Antidilutive stock options not included in diluted earnings per share

     3,634,614         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
Receivables (Tables)
Components of Receivables

Receivables consisted of the following (in thousands):

 

     September 30,      December 31,  
     2014      2013  

Accounts receivable, net

   $ 15,881       $ 8,649   

Warranty insurance receivable

     10,762         12,489   

Notes and contracts receivable

     300         39,259   
  

 

 

    

 

 

 

Total receivables

   $ 26,943       $ 60,397   
  

 

 

    

 

 

 
Real Estate Inventories (Tables)

Real estate inventories consisted of the following (in thousands):

 

     September 30,      December 31,  
     2014      2013  

Real estate inventories owned:

     

Homes completed or under construction

   $ 567,359       $ 308,856   

Land under development

     1,272,041         760,731   

Land held for future use

     249,561         264,120   

Model homes

     93,049         53,351   
  

 

 

    

 

 

 

Total real estate inventories owned

     2,182,010         1,387,058   

Real estate inventories not owned:

     

Land purchase and land option deposits

     50,531         38,788   

Consolidated inventory held by VIEs

     31,199         39,680   
  

 

 

    

 

 

 

Total real estate inventories not owned

     81,730         78,468   
  

 

 

    

 

 

 

Total real estate inventories

   $ 2,263,740       $ 1,465,526   
  

 

 

    

 

 

 

Interest incurred, capitalized and expensed were as follows (in thousands):

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  

Interest incurred

   $ 15,129      $ 5,744      $ 25,718      $ 16,348   

Interest capitalized

     (14,839     (4,916     (22,987     (14,142
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expensed

   $ 290      $ 828      $ 2,731      $ 2,206   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capitalized interest in beginning inventory

   $ 113,765      $ 145,930      $ 138,233      $ 155,823   

Interest capitalized as a cost of inventory

     14,839        4,916        22,987        14,142   

Interest previously capitalized as a cost of inventory, included in cost of sales

     (7,835     (8,730     (40,451     (27,849
  

 

 

   

 

 

   

 

 

   

 

 

 

Capitalized interest in ending inventory

   $ 120,769      $ 142,116      $ 120,769      $ 142,116   
  

 

 

   

 

 

   

 

 

   

 

 

 

Real estate inventory impairments and land option abandonments consisted of the following (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  

Real estate inventory impairments

   $ 248       $ 230       $ 300       $ 592   

Land option abandonments and pre-acquisition costs

     304         319         824         653   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 552       $ 549       $ 1,124       $ 1,245   
  

 

 

    

 

 

    

 

 

    

 

 

 
Investments in Unconsolidated Entities (Tables)

Our cumulative investment in entities accounted for on the equity method, including our share of earnings and losses, consisted of the following (in thousands):

 

     September 30,      December 31,  
     2014      2013  

Limited partnership and limited liability company interests

   $ 13,135       $ 18,454   

General partnership interests

     2,937         2,469   
  

 

 

    

 

 

 

Total

   $ 16,072       $ 20,923   
  

 

 

    

 

 

 

Aggregated assets, liabilities and operating results of the entities we account for as equity-method investments are provided below. Because our ownership interest in these entities varies, a direct relationship does not exist between the information presented below and the amounts that are reflected on our consolidated balance sheets as our investment in unconsolidated entities or on our consolidated statement of operations as equity in (loss) income of unconsolidated entities.

Assets and liabilities of unconsolidated entities (in thousands):

 

     September 30,      December 31,  
     2014      2013  

Assets

   $ 138,845       $ 274,942   

Liabilities

   $ 17,158       $ 76,248   

Results of operations from unconsolidated entities (in thousands):

 

     Nine Months Ended
September 30,
    Year Ended
December 31,
 
     2014     2013  

Net sales and revenues

   $ 591      $ 6,271   

Operating loss

   $ (2,781   $ (1,250

Net loss

   $ (2,765   $ (1,268
Variable Interest Entities (Tables)
Summary of Interests in Land Option Agreements

The following provides a summary of our interests in land option agreements (in thousands):

 

     September 30, 2014      December 31, 2013  
            Remaining      Consolidated             Remaining      Consolidated  
            Purchase      Inventory             Purchase      Inventory  
     Deposits      Price      Held by VIEs      Deposits      Price      Held by VIEs  

Consolidated VIEs

   $ 8,265       $ 37,894       $ 31,199       $ 6,979       $ 34,724       $ 39,680   

Unconsolidated VIEs

     17,890         122,901         N/A         7,102         75,171         N/A   

Other land option agreements

     32,641         206,293         N/A         31,686         321,240         N/A   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 58,796       $ 367,088       $ 31,199       $ 45,767       $ 431,135       $ 39,680   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Goodwill and Other Intangible Assets (Tables)

Goodwill and other intangible assets consisted of the following (in thousands):

 

     September 30, 2014      December 31, 2013  
     Gross            Net      Gross            Net  
     Carrying      Accumulated     Carrying      Carrying      Accumulated     Carrying  
     Amount      Amortization     Amount      Amount      Amortization     Amount  

Goodwill

   $ 132,451       $ —        $ 132,451       $ —         $ —        $ —     

Trade names

     23,879         (4,586     19,293         10,679         (4,185     6,494   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 156,330       $ (4,586   $ 151,744       $ 10,679       $ (4,185   $ 6,494   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Expected amortization of our intangible asset related to Maracay for the next five years and thereafter is (in thousands):

 

     September 30,  
     2014  

Remainder of 2014

   $ 133   

2015

     534   

2016

     534   

2017

     534   

2018

     534   

Thereafter

     3,824   
  

 

 

 

Total

   $ 6,093   
  

 

 

 
Other Assets (Tables)
Schedule of Other Assets

Other assets consisted of the following (in thousands):

 

     September 30,      December 31,  
     2014      2013  

Prepaid expenses

   $ 27,131       $ 8,590   

Refundable fees and other deposits

     17,647         19,566   

Development rights, held for future use or sale

     7,409         9,090   

Deferred loan costs

     24,699         —     

Operating properties and equipment, net

     10,644         17,386   

Income tax receivable

     8,297         —     

Other

     7,786         8,999   
  

 

 

    

 

 

 
   $ 103,613       $ 63,631   
  

 

 

    

 

 

 
Accrued Expenses and Other Liabilities (Tables)
Schedule of Accrued Expenses and Other Liabilities

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

 

     September 30,      December 31,  
     2014      2013  

Accrued payroll

   $ 24,584       $ 48,232   

Accrued interest on senior notes and notes payable

     14,703         —     

Warranty reserves (Note 15)

     32,091         24,449   

Estimated cost for completion

     45,697         53,160   

Customer deposits

     18,693         13,432   

Debt (nonrecourse) held by VIEs

     10,729         6,571   

Income tax liability to Weyerhaeuser

     15,688         16,577   

Other

     38,909         28,261   
  

 

 

    

 

 

 
   $ 201,094       $ 190,682   
  

 

 

    

 

 

 
Senior Notes and Notes Payable and Other Borrowings (Tables)

Senior notes consisted of the following (in thousands):

 

     September 30,      December 31,  
     2014      2013  

4.375% Senior notes due June 15, 2019, net of discount

   $ 445,280       $ —     

5.875% Senior notes due June 15, 2024, net of discount

     441,850         —     
  

 

 

    

 

 

 
   $ 887,130       $ —     
  

 

 

    

 

 

 

Notes payable and other borrowings consisted of the following (in thousands):

 

     September 30,      December 31,  
     2014      2013  

Unsecured revolving credit facility

   $ 260,000       $ —     

Seller financed loan

     17,128         —     

Debt payable to Weyerhaeuser

     —           834,589   
  

 

 

    

 

 

 
   $ 277,128       $ 834,589   
  

 

 

    

 

 

 
Fair Value Disclosures (Tables)

The following table presents net book values and estimated fair values of our financial instruments (in thousands):

 

            September 30, 2014      December 31, 2013  
     Hierarchy      Book Value      Fair Value      Book Value      Fair Value  

Receivables

     Level 3       $ 26,943       $ 26,943       $ 60,397       $ 60,390   

Senior notes

     Level 2         887,130         885,375         —           —     

Notes payable and other borrowings

     Level 3         277,128         277,128         —           —     

The following table presents impairment charges and the remaining net fair value for nonfinancial assets that were measured during the periods presented (in thousands):

 

            September 30, 2014      December 31, 2013  
                   Fair Value             Fair Value  
            Impairment      Net of      Impairment      Net of  
     Hierarchy      Charge      Impairment      Charge      Impairment  

Real estate inventories

     Level 3       $ 300       $ 8,360       $ 341,086       $ 21,528   
Commitments and Contingencies (Tables)
Schedule of Warranty Reserves

Warranty reserves consisted of the following (in thousands):

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  

Warranty reserves, beginning of period

   $ 24,324      $ 23,921      $ 24,449      $ 24,485   

Warranty reserves accrued

     3,691        1,915        7,455        6,283   

Liabilities assumed in the Merger

     7,481        —          7,481        —     

Adjustments to pre-existing reserves

     (809     406        209        595   

Warranty expenditures

     (2,596     (2,246     (7,503     (7,367
  

 

 

   

 

 

   

 

 

   

 

 

 

Warranty reserves, end of period

   $ 32,091      $ 23,996      $ 32,091      $ 23,996   
  

 

 

   

 

 

   

 

 

   

 

 

 
Stock-Based Compensation (Tables)

The following table presents compensation expense recognized related to all stock-based awards (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  

Total stock-based compensation

   $ 3,547       $ 1,283       $ 6,250       $ 3,704   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents a summary of stock option awards for the nine months ended September 30, 2014:

 

     Nine Months Ended September 30, 2014  
           Weighted      Weighted         
           Average      Average      Aggregate  
           Exercise      Remaining      Intrinsic  
           Price      Contractual      Value  
     Options     Per Share      Life      (in 000’s)  

Options outstanding at December 31, 2013(1)

     285,900      $ 17.04         9.1       $ 827   

Granted

     154,598        16.17         9.5         —     

Assumed in the Merger

     3,379,275        12.62         6.2         3,925   

Exercised

     —             

Forfeited

     (185,159     13.81         
  

 

 

         

Options outstanding at September 30, 2014

     3,634,614        13.07         6.4      
  

 

 

         

Options exercisable at September 30, 2014

     1,828,232        12.26         4.2      
  

 

 

         

 

(1) Options outstanding at December 31, 2013 reflect outstanding options for the legal acquirer, TRI Pointe.

The fair value of stock option awards assumed in the Merger was determined by using an option-based model with the following assumptions:

 

     2014 Grants     2013 Grants     2012 Grants     2011 Grants  

Dividend yield

     0.00     0.00     0.00     0.00

Expected volatility

     48.99     47.88     43.69     41.58

Risk-free interest rate

     1.97     1.97     1.73     1.73

Expected life (in years)

     6.05        5.81        5.55        5.30   

The following table presents a summary of restricted stock units (“RSUs”) for the nine months ended September 30, 2014:

 

     Nine Months Ended September 30, 2014  
           Weighted         
           Average      Aggregate  
     Restricted     Grant Date      Intrinsic  
     Stock     Fair Value      Value  
     Units     Per Share      (in 000’s)  

Nonvested RSUs at December 31, 2013(1)

     145,517      $ 17.68       $ 2,900   

Granted

     274,287        15.59         3,549   

Assumed in the Merger

     726,678        15.74         9,403   

Vested

     (57,811     17.63      

Forfeited

     (139,116     15.85      
  

 

 

      

Nonvested RSUs at September 30, 2014

     949,555        15.87         12,287   
  

 

 

      

 

(1) Nonvested RSUs at December 31, 2013 reflect nonvested RSUs for the legal acquirer, TRI Pointe.
Income Taxes (Tables)
Schedule of Pro Forma Income from Continuing Operations and Pro Forma Earnings Per Share

If we were to calculate income taxes using the separate return method, the effect on pro forma income from continuing operations and pro forma earnings per share would be as follows (in thousands, except per share amounts):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Income from continuing operations before income tax as reported in the accompanying financial statements

   $ 16,986     

$

31,530

  

  $ 59,123      $ 44,059   

Provision for income taxes assuming computation on a separate return basis

     (6,021     (11,589     (22,138     (15,732
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma income from continuing operations

   $ 10,965      $ 19,941      $ 36,985      $ 28,327   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma earnings per share - basic

   $ 0.07      $ 0.15      $ 0.27      $ 0.22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma earnings per share - diluted

   $ 0.07      $ 0.15      $ 0.26      $ 0.22   
  

 

 

   

 

 

   

 

 

   

 

 

 
Related Party Transactions (Tables)
Schedule of Allocated Corporate General and Administrative Expenses

Weyerhaeuser-allocated corporate general and administrative expenses were as follows (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  

Weyerhaeuser-allocated costs

   $ —         $ 6,292       $ 10,735       $ 17,966   
Discontinued Operations (Tables)
Schedule of Earnings Discontinued Operations

Earnings of discontinued operations is as follows (in thousands):

 

     Nine Months Ended
September 30,
 
     2014      2013  

Earnings before income taxes

   $ —         $ 597   

Provision for income taxes

     —           (213
  

 

 

    

 

 

 

Discontinued operations, net of income taxes

   $ —         $ 384   
  

 

 

    

 

 

 
Supplemental Disclosure to Consolidated Statements of Cash Flow (Tables)
Supplemental Disclosure to Consolidated Statements of Cash Flows

The following are supplemental disclosures to the consolidated statements of cash flows (in thousands):

 

     Nine Months Ended
September 30,
 
     2014     2013  

Supplemental disclosure of cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 15,337      $ 15,384   

Income taxes

   $ 14,962      $ 1,313   

Supplemental disclosures of noncash activities:

    

Increase in real estate inventory due to distribution of land from an unconsolidated joint venture

   $ 5,132      $ —     

Distribution to Weyerhaeuser of excluded assets and liabilities

   $ 125,019      $ —     

Amounts owed to Weyerhaeuser related to the tax sharing agreement

   $ 15,688      $ —     

Noncash settlement of debt payable to Weyerhaeuser

   $ 70,082      $ —     

Effect of net consolidation and de-consolidation of variable interest entities:

    

Increase in consolidated real estate inventory not owned

   $ 4,497      $ 1,137   

Increase in debt held by variable interest entities

   $ —        $ (4,056

Increase in accrued expenses and other liabilities

   $ —        $ (838

(Increase) decrease in noncontrolling interests

   $ (4,497   $ 3,757   

Acquisition of TRI Pointe (Note 2):

    

Fair value of assets, excluding cash acquired

   $ 728,403      $ —     

Liabilities assumed

   $ 279,755      $ —     
Organization, Basis of Presentation and Summary of Significant Accounting Policies - Additional Information (Detail) (Common Stock [Member])
0 Months Ended
Jul. 7, 2014
Common Stock [Member]
 
Organization And Summary Of Significant Accounting Policies [Line Items]
 
Conversion of shares, issued and outstanding
1.297 
Merger with Weyerhaeuser Real Estate Company - Additional Information (Detail) (USD $)
0 Months Ended 3 Months Ended 9 Months Ended
Jun. 13, 2014
Deposit
Sep. 30, 2014
Sep. 30, 2014
Dec. 31, 2013
Business Acquisition [Line Items]
 
 
 
 
Common stock shares issued
 
161,338,746 
161,338,746 
129,700,000 
Amount of adjustment based on transaction agreement
 
$ 31,500,000 
$ 31,500,000 
 
Net proceeds offering
861,300,000 
 
886,698,000 
 
Number of escrow accounts
 
 
 
Transaction agreement date
 
 
Nov. 03, 2013 
 
Transaction costs directly related to Merger
 
16,710,000 
17,216,000 
 
Trade names [Member]
 
 
 
 
Business Acquisition [Line Items]
 
 
 
 
Acquisition related to trade names
 
13,200,000 
13,200,000 
 
4.375% Senior notes due 2019 [Member]
 
 
 
 
Business Acquisition [Line Items]
 
 
 
 
Aggregate principal amount
 
450,000,000 
450,000,000 
 
Interest rate on senior note
 
4.375% 
4.375% 
4.375% 
Debt instrument, maturity year
 
 
2019 
 
5.875% Senior notes due 2024 [Member]
 
 
 
 
Business Acquisition [Line Items]
 
 
 
 
Aggregate principal amount
 
450,000,000 
450,000,000 
 
Interest rate on senior note
 
5.875% 
5.875% 
5.875% 
Debt instrument, maturity year
 
 
2024 
 
WRECO transaction [Member]
 
 
 
 
Business Acquisition [Line Items]
 
 
 
 
Cash payment to be made subject to adjustment
743,700,000 
 
 
 
WRECO transaction [Member] |
Transaction Agreement [Member]
 
 
 
 
Business Acquisition [Line Items]
 
 
 
 
Cash payment to be made subject to adjustment
739,000,000 
 
 
 
WRECO transaction [Member] |
Unpaid Interest [Member]
 
 
 
 
Business Acquisition [Line Items]
 
 
 
 
Cash payment to be made subject to adjustment
4,700,000 
 
 
 
TRI Pointe [Member]
 
 
 
 
Business Acquisition [Line Items]
 
 
 
 
Common stock shares issued
 
129,700,000 
129,700,000 
 
Percentage of common stock outstanding
 
79.60% 
79.60% 
 
Percentage of common stock owned after the Merger by TRI Pointe shareholders of record prior to the Merger
 
 
19.40% 
 
Cash retained by the Company
 
$ 117,600,000 
$ 117,600,000 
 
TRI Pointe [Member] |
WRECO transaction [Member]
 
 
 
 
Business Acquisition [Line Items]
 
 
 
 
Outstanding equity awards of the employee in percentage
 
1.00% 
1.00% 
 
Merger with Weyerhaeuser Real Estate Company - Summary of Calculation of Fair Value of Total Consideration Transferred and Provisional Amounts Recognized (Detail) (USD $)
In Thousands, except Share data, unless otherwise specified
9 Months Ended
Sep. 30, 2014
Dec. 31, 2013
Sep. 30, 2014
WRECO transaction [Member]
Calculation of consideration transferred
 
 
 
TRI Pointe shares outstanding
161,338,746 
129,700,000 
31,632,533 
TRI Pointe closing stock price on July 7, 2014
 
 
$ 15.85 
Consideration attributable to common stock
 
 
$ 501,376 
Consideration attributable to TRI Pointe equity awards
 
 
1,072 
Total consideration transferred
 
 
502,448 
Assets acquired and liabilities assumed
 
 
 
Cash and cash equivalents
 
 
53,800 
Accounts receivable
 
 
654 
Real estate inventories
 
 
554,038 
Intangible asset
 
 
13,200 
Goodwill
132,451 
 
132,451 
Other assets
 
 
28,060 
Total assets acquired
 
 
782,203 
Accounts payable
 
 
26,105