TRI POINTE GROUP, INC., 10-Q filed on 4/27/2016
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2016
Apr. 22, 2016
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Mar. 31, 2016 
 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q1 
 
Trading Symbol
TPH 
 
Entity Registrant Name
TRI Pointe Group, Inc. 
 
Entity Central Index Key
0001561680 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
162,048,087 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2016
Dec. 31, 2015
Assets
 
 
Cash and cash equivalents
$ 144,019 
$ 214,485 
Receivables
32,688 
43,710 
Real estate inventories
2,705,251 
2,519,273 
Investments in unconsolidated entities
17,494 
18,999 
Goodwill and other intangible assets, net
161,895 
162,029 
Deferred tax assets, net
126,812 
130,657 
Other assets
45,918 
48,918 
Total assets
3,234,077 
3,138,071 
Liabilities
 
 
Accounts payable
67,601 
64,840 
Accrued expenses and other liabilities
201,302 
216,263 
Unsecured revolving credit facility
374,392 
299,392 
Seller financed loans
 
2,434 
Senior notes, net
869,939 
868,679 
Total liabilities
1,513,234 
1,451,608 
Commitments and contingencies (Note 14)
   
   
Stockholders’ Equity:
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized; no shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively
   
   
Common stock, $0.01 par value, 500,000,000 shares authorized; 162,007,850 and 161,813,750 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively
1,620 
1,618 
Additional paid-in capital
912,719 
911,197 
Retained earnings
780,418 
751,868 
Total stockholders’ equity
1,694,757 
1,664,683 
Noncontrolling interests
26,086 
21,780 
Total equity
1,720,843 
1,686,463 
Total liabilities and equity
$ 3,234,077 
$ 3,138,071 
Consolidated Balance Sheets (Parenthetical) (USD $)
Mar. 31, 2016
Dec. 31, 2015
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
162,007,850 
161,813,750 
Common stock, shares outstanding
162,007,850 
161,813,750 
Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 12 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Dec. 31, 2015
Homebuilding:
 
 
 
Home sales revenue
$ 423,055 
$ 374,265 
 
Land and lot sales revenue
355 
2,000 
 
Other operations
580 
993 
 
Total revenues
423,990 
377,258 
 
Cost of home sales
324,499 
299,907 
 
Cost of land and lot sales
779 
2,308 
 
Other operations
566 
562 
 
Sales and marketing
26,321 
23,286 
 
General and administrative
28,396 
28,153 
 
Restructuring charges
135 
222 
 
Homebuilding income from operations
43,294 
22,820 
 
Equity in (loss) income of unconsolidated entities
(14)
107 
 
Other income, net
115 
256 
 
Homebuilding income before taxes
43,395 
23,183 
 
Financial Services:
 
 
 
Revenues
148 
 
 
Expenses
58 
26 
 
Equity in income (loss) of unconsolidated entities
715 
(33)
 
Financial services income (loss) from operations before taxes
805 
(59)
 
Income before taxes
44,200 
23,124 
 
Provision for income taxes
(15,490)
(7,827)
 
Net income
28,710 
15,297 
207,181 
Net income attributable to noncontrolling interests
(160)
 
 
Net income available to common stockholders
$ 28,550 
$ 15,297 
 
Earnings per share
 
 
 
Basic
$ 0.18 
$ 0.09 
 
Diluted
$ 0.18 
$ 0.09 
 
Weighted average shares outstanding
 
 
 
Basic
161,895,640 
161,490,970 
 
Diluted
162,192,610 
162,807,376 
 
Consolidated Statements 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, 2014
$ 1,472,476 
$ 1,614 
$ 906,159 
$ 546,407 
$ 1,454,180 
$ 18,296 
Beginning Balance, Shares at Dec. 31, 2014
 
161,355,490 
 
 
 
 
Net income
207,181 
 
 
205,461 
205,461 
1,720 
Adjustment to capital contribution by Weyerhaeuser, net
(6,747)
 
(6,747)
 
(6,747)
 
Shares issued under share-based awards
1,616 
1,612 
 
1,616 
 
Shares issued under share-based awards, Shares
 
458,260 
 
 
 
 
Excess tax benefit of share-based awards, net
428 
 
428 
 
428 
 
Minimum tax withholding paid on behalf of employees for restricted stock units
(2,190)
 
(2,190)
 
(2,190)
 
Stock-based compensation expense
11,935 
 
11,935 
 
11,935 
 
Distributions to noncontrolling interests, net
(3,833)
 
 
 
 
(3,833)
Net effect of consolidations, de-consolidations and other transactions
5,597 
 
 
 
 
5,597 
Ending Balance at Dec. 31, 2015
1,686,463 
1,618 
911,197 
751,868 
1,664,683 
21,780 
Ending Balance, Shares at Dec. 31, 2015
161,813,750 
161,813,750 
 
 
 
 
Net income
28,710 
 
 
28,550 
28,550 
160 
Shares issued under share-based awards
 
 
Shares issued under share-based awards, Shares
 
194,100 
 
 
 
 
Minimum tax withholding paid on behalf of employees for restricted stock units
(1,087)
 
(1,087)
 
(1,087)
 
Stock-based compensation expense
2,605 
 
2,605 
 
2,605 
 
Distributions to noncontrolling interests, net
(1,719)
 
 
 
 
(1,719)
Net effect of consolidations, de-consolidations and other transactions
5,865 
 
 
 
 
5,865 
Ending Balance at Mar. 31, 2016
$ 1,720,843 
$ 1,620 
$ 912,719 
$ 780,418 
$ 1,694,757 
$ 26,086 
Ending Balance, Shares at Mar. 31, 2016
162,007,850 
162,007,850 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Cash flows from operating activities
 
 
Net income
$ 28,710 
$ 15,297 
Adjustments to reconcile net income to net cash used in operating activities:
 
 
Depreciation and amortization
1,792 
1,481 
Equity in income of unconsolidated entities, net
(701)
(74)
Deferred income taxes, net
3,845 
2,018 
Amortization of stock-based compensation
2,605 
2,381 
Charges for impairments and lot option abandonments
182 
360 
Changes in assets and liabilities:
 
 
Real estate inventories
(180,540)
(127,304)
Receivables
11,141 
(2,894)
Other assets
2,871 
6,963 
Accounts payable
2,761 
(7,865)
Accrued expenses and other liabilities
(14,828)
1,323 
Returns on investments in unconsolidated entities, net
2,486 
 
Net cash used in operating activities
(139,676)
(108,314)
Cash flows from investing activities:
 
 
Purchases of property and equipment
(411)
(378)
Investments in unconsolidated entities
(13)
(978)
Net cash used in investing activities
(424)
(1,356)
Cash flows from financing activities:
 
 
Borrowings from debt
75,000 
50,000 
Repayment of debt
(2,434)
(2,535)
Net repayments of debt held by variable interest entities
(132)
(742)
Contributions from noncontrolling interests
808 
873 
Distributions to noncontrolling interests
(2,527)
(726)
Proceeds from issuance of common stock under share-based awards
263 
Excess tax benefits of share-based awards
 
308 
Minimum tax withholding paid on behalf of employees for share-based awards
(1,087)
(1,827)
Net cash provided by financing activities
69,634 
45,614 
Net decrease in cash and cash equivalents
(70,466)
(64,056)
Cash and cash equivalents - beginning of period
214,485 
170,629 
Cash and cash equivalents - end of period
$ 144,019 
$ 106,573 
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 Group is engaged in the design, construction and sale of innovative single-family attached and detached 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.

Formation of TRI Pointe Group

On July 7, 2015, TRI Pointe Homes reorganized its corporate structure (the “Reorganization”) whereby TRI Pointe Homes became a direct, wholly owned subsidiary of TRI Pointe Group.  As a result of the Reorganization, each share of common stock, par value $0.01 per share, of TRI Pointe Homes (“Homes Common Stock”) was cancelled and converted automatically into the right to receive one validly issued, fully paid and non-assessable share of common stock, par value $0.01 per share, of TRI Pointe Group (“Group Common Stock”), each share having the same designations, rights, powers and preferences, and the qualifications, limitations and restrictions thereof as the shares of Homes Common Stock being so converted.  TRI Pointe Group, as the successor issuer to TRI Pointe Homes (pursuant to Rule 12g-3(a) under the Exchange Act), began making filings under the Securities Act and the Exchange Act on July 7, 2015.

In connection with the Reorganization, TRI Pointe Group (i) became a co-issuer of TRI Pointe Homes’ 4.375% Senior Notes due 2019 (the “2019 Notes”) and TRI Pointe Homes’ 5.875% Senior Notes due 2024 (the “2024 Notes” and together with the 2019 Notes, the “Senior Notes”); and (ii) replaced TRI Pointe Homes as the borrower under TRI Pointe Homes’ existing unsecured revolving credit facility.

Basis of Presentation

The accompanying financial statements have been prepared in accordance with GAAP, as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries as described in “Reverse Acquisition” below, as well as other entities in which the Company has a controlling interest and variable interest entities (“VIEs”) in which the Company is the primary beneficiary.  The noncontrolling interests as of March 31, 2016 and December 31, 2015 represent the outside owners’ interests in the Company’s consolidated entities and the net equity of the VIE owners.  All significant intercompany accounts have been eliminated upon consolidation.  In the opinion of management, all adjustments consisting of normal recurring adjustments, necessary for a fair presentation with respect to interim financial statements, have been included.

Reverse Acquisition

On the Closing Date, TRI Pointe consummated the Merger with WRECO, with WRECO becoming a wholly owned subsidiary of TRI Pointe. The Merger is accounted for in accordance with ASC Topic 805, Business Combinations. For accounting purposes, the Merger is treated as a “reverse acquisition” and WRECO is considered the accounting acquirer.

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 and the disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from our estimates.

Reclassifications

Certain amounts in our consolidated financial statements for prior years have been reclassified to conform to the current period presentation.

Recently Issued Accounting Standards

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. On July 9, 2015, the FASB voted to defer the effective date of ASU No. 2014-09 by one year and it is now effective for public entities for the annual periods ending after December 15, 2017, and for annual and interim periods thereafter.  Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09.  Early adoption is permitted, but can be no earlier than the original public entity effective date of fiscal years, and the interim periods within those years, beginning after December 15, 2016.  We are currently evaluating the approach for implementation and the potential impact of adopting this guidance on our consolidated financial statements.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (“ASU 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, 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 February 2015, the FASB issued Accounting Standards Update No. 2015-02, (“ASU 2015-02”), Consolidation (Topic 810): Amendments to the Consolidation Analysis.   ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. ASU 2015-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015.  We adopted ASU 2015-02 on January 1, 2016 and the adoption had no impact on our current or prior year financial statements.

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, (“ASU 2015-17”), Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires deferred tax liabilities and assets be classified as noncurrent in a classified statement of position.  ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.  The adoption of ASU 2015-17 is not expected to have a material effect on our consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, (“ASU 2016-02”), Leases (Topic 842): Leases, which requires an entity to recognize assets and liabilities on the balance sheet for the rights and obligations created by leased assets and provide additional disclosures. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and, at that time, we will adopt the new standard using a modified retrospective approach. We are currently evaluating the impact that the adoption of ASU 2016-02 may have on our consolidated financial statements and disclosures.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, (“ASU 2016-09”), Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. We are currently evaluating the impact that the adoption of ASU 2016-09 may have on our consolidated financial statements and disclosures.

Restructuring
Restructuring

2.

Restructuring

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

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Employee-related charges

 

$

13

 

 

$

112

 

Lease termination charges

 

 

122

 

 

 

110

 

Total

 

$

135

 

 

$

222

 

 

Employee-related charges of $13,000 and $112,000 for the three months ended March 31, 2016 and 2015, respectively, relate to severance-related expenses for employees terminated during the period.  Lease termination charges of $122,000 and $110,000 for the three months ended March 31, 2016, and 2015, respectively, relate to the adjustment of restructuring reserves related to the estimate of sublease income.

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

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Accrued employee-related charges, beginning of period

 

$

220

 

 

$

3,844

 

Current year charges

 

 

13

 

 

 

112

 

Payments

 

 

(159

)

 

 

(3,423

)

Accrued employee-related charges, end of period

 

$

74

 

 

$

533

 

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Accrued lease termination charges, beginning of period

 

$

767

 

 

$

1,394

 

Current year charges

 

 

122

 

 

 

110

 

Payments

 

 

(312

)

 

 

(578

)

Accrued lease termination charges, end of period

 

$

577

 

 

$

926

 

 

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

 

Segment Information
Segment Information

3.

Segment Information

We operate two principal businesses: homebuilding and financial services.

Our homebuilding operations consist of six homebuilding companies that acquire and develop land and construct and sell single-family detached and attached 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 upon the above factors, our homebuilding operations are comprised of the following six reportable segments: Maracay Homes, consisting of operations in Arizona; Pardee Homes, consisting of operations in California and Nevada; Quadrant Homes, consisting of operations in Washington; Trendmaker Homes, consisting of operations in Texas; TRI Pointe Homes, consisting of operations in California and Colorado; and Winchester Homes, consisting of operations in Maryland and Virginia.

Our financial services operation (“TRI Pointe Solutions”) is a reportable segment and is comprised of mortgage financing operations (“TRI Pointe Connect”) and title services operations (“TRI Pointe Assurance”).  While our homebuyers may obtain financing from any mortgage provider of their choice, TRI Pointe Connect, which was formed as a joint venture with an established mortgage lender, can act as a preferred mortgage broker to our homebuyers in all of the markets in which we operate, providing mortgage financing that helps facilitate the sale and closing process as well as generate additional fee income for us.  TRI Pointe Assurance provides title examinations for our homebuyers in our Trendmaker Homes and Winchester Homes brands.  TRI Pointe Assurance is a wholly owned subsidiary of TRI Pointe and acts as a title agency for First American Title Insurance Company.  We commenced our financial services operation in the fourth quarter of 2014.

The term “Corporate” refers to 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, internal audit 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, Organization, Basis of Presentation and Summary of Significant Accounting Policies. 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 before taxes for each of our reportable segments were as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

Maracay Homes

 

$

45,437

 

 

$

32,477

 

Pardee Homes

 

 

118,933

 

 

 

85,658

 

Quadrant Homes

 

 

46,058

 

 

 

45,629

 

Trendmaker Homes

 

 

43,786

 

 

 

56,208

 

TRI Pointe Homes

 

 

131,957

 

 

 

106,858

 

Winchester Homes

 

 

37,819

 

 

 

50,428

 

Total homebuilding revenues

 

 

423,990

 

 

 

377,258

 

Financial services

 

 

148

 

 

 

 

Total

 

$

424,138

 

 

$

377,258

 

 

 

 

 

 

 

 

 

 

Income (loss) before taxes

 

 

 

 

 

 

 

 

Maracay Homes

 

$

2,636

 

 

$

1,040

 

Pardee Homes

 

 

32,131

 

 

 

13,559

 

Quadrant Homes

 

 

3,696

 

 

 

1,580

 

Trendmaker Homes

 

 

2,058

 

 

 

4,360

 

TRI Pointe Homes

 

 

10,715

 

 

 

11,132

 

Winchester Homes

 

 

661

 

 

 

381

 

Corporate

 

 

(8,502

)

 

 

(8,869

)

Total homebuilding income before taxes

 

 

43,395

 

 

 

23,183

 

Financial services

 

 

805

 

 

 

(59

)

Total

 

$

44,200

 

 

$

23,124

 

 

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Real estate inventories

 

 

 

 

 

 

 

 

Maracay Homes

 

$

211,362

 

 

$

206,912

 

Pardee Homes

 

 

1,066,086

 

 

 

1,011,982

 

Quadrant Homes

 

 

209,707

 

 

 

190,038

 

Trendmaker Homes

 

 

214,290

 

 

 

199,398

 

TRI Pointe Homes

 

 

742,753

 

 

 

659,130

 

Winchester Homes

 

 

261,053

 

 

 

251,813

 

Total

 

$

2,705,251

 

 

$

2,519,273

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

 

 

 

Maracay Homes

 

$

241,762

 

 

$

227,857

 

Pardee Homes

 

 

1,139,330

 

 

 

1,089,586

 

Quadrant Homes

 

 

231,436

 

 

 

202,024

 

Trendmaker Homes

 

 

227,791

 

 

 

213,562

 

TRI Pointe Homes

 

 

907,366

 

 

 

832,423

 

Winchester Homes

 

 

289,890

 

 

 

278,374

 

Corporate

 

 

193,688

 

 

 

292,169

 

Total homebuilding assets

 

 

3,231,263

 

 

 

3,135,995

 

Financial services

 

 

2,814

 

 

 

2,076

 

Total

 

$

3,234,077

 

 

$

3,138,071

 

 

Earnings Per Share
Earnings Per Share

4.

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 March 31,

 

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

28,550

 

 

$

15,297

 

Denominator:

 

 

 

 

 

 

 

 

Basic weighted-average shares outstanding

 

 

161,895,640

 

 

 

161,490,970

 

Effect of dilutive shares:

 

 

 

 

 

 

 

 

Stock options and unvested restricted stock units

 

 

296,970

 

 

 

1,316,406

 

Diluted weighted-average shares outstanding

 

 

162,192,610

 

 

 

162,807,376

 

Earnings per share

 

 

 

 

 

 

 

 

Basic

 

$

0.18

 

 

$

0.09

 

Diluted

 

$

0.18

 

 

$

0.09

 

Antidilutive stock options not included in diluted earnings per

   share

 

 

5,449,790

 

 

 

1,266,863

 

 

Receivables
Receivables

5.

Receivables

Receivables consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Escrow proceeds and other accounts receivable, net

 

$

22,026

 

 

$

32,917

 

Warranty insurance receivable (Note 14)

 

 

10,362

 

 

 

10,493

 

Notes and contracts receivable

 

 

300

 

 

 

300

 

Total receivables

 

$

32,688

 

 

$

43,710

 

 

Real Estate Inventories
Real Estate Inventories

6.

Real Estate Inventories

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Real estate inventories owned:

 

 

 

 

 

 

 

 

Homes completed or under construction

 

$

650,602

 

 

$

575,076

 

Land under development

 

 

1,554,925

 

 

 

1,443,461

 

Land held for future development

 

 

295,428

 

 

 

295,241

 

Model homes

 

 

146,078

 

 

 

140,232

 

Total real estate inventories owned

 

 

2,647,033

 

 

 

2,454,010

 

Real estate inventories not owned:

 

 

 

 

 

 

 

 

Land purchase and land option deposits

 

 

24,278

 

 

 

39,055

 

Consolidated inventory held by VIEs

 

 

33,940

 

 

 

26,208

 

Total real estate inventories not owned

 

 

58,218

 

 

 

65,263

 

Total real estate inventories

 

$

2,705,251

 

 

$

2,519,273

 

 

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 development 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 variable interest entities. For further details, see Note 8, Variable Interest Entities.

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

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Interest incurred

 

$

15,149

 

 

$

15,176

 

Interest capitalized

 

 

(15,149

)

 

 

(15,176

)

Interest expensed

 

$

 

 

$

 

Capitalized interest in beginning inventory

 

$

140,311

 

 

$

124,461

 

Interest capitalized as a cost of inventory

 

 

15,149

 

 

 

15,176

 

Interest previously capitalized as a cost of inventory,

   included in cost of sales

 

 

(8,830

)

 

 

(6,765

)

Capitalized interest in ending inventory

 

$

146,630

 

 

$

132,872

 

 

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, net.

Real estate inventory impairments and land and lot option abandonments

Land and lot option abandonments and pre-acquisition charges were as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Land and lot option abandonments and pre-acquisition charges

 

 

182

 

 

 

360

 

Total

 

$

182

 

 

$

360

 

 

Impairments of real estate inventory relate primarily to projects or communities that include homes completed or under construction. Within a project or community, 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.  Charges for inventory impairments are expensed to cost of sales. During the three month periods ended March 31, 2016 and 2015, respectively, the Company did not incur any real estate inventory impairment charges.

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

7.

Investments in Unconsolidated Entities

As of March 31, 2016, we held equity investments in six active homebuilding partnerships or limited liability companies and one financial services limited liability company. Our participation in these entities may be as a developer, a builder, or an investment partner. Our ownership percentage varies from 7% to 55%, depending on the investment, with no controlling interest held in any of these investments.

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):

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Limited liability company interests

 

$

14,226

 

 

$

15,739

 

General partnership interests

 

 

3,268

 

 

 

3,260

 

Total

 

$

17,494

 

 

$

18,999

 

 

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 income (loss) of unconsolidated entities.

Assets and liabilities of unconsolidated entities (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Cash

 

$

14,871

 

 

$

18,641

 

Receivables

 

 

5,588

 

 

 

13,108

 

Real estate inventories

 

 

94,309

 

 

 

92,881

 

Other assets

 

 

1,147

 

 

 

1,180

 

Total assets

 

$

115,915

 

 

$

125,810

 

Liabilities and equity

 

 

 

 

 

 

 

 

Accounts payable and other liabilities

 

$

8,296

 

 

$

14,443

 

Company’s equity

 

 

17,494

 

 

 

18,999

 

Outside interests' equity

 

 

90,125

 

 

 

92,368

 

Total liabilities and equity

 

$

115,915

 

 

$

125,810

 

 

Results of operations from unconsolidated entities (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Net sales

 

$

3,209

 

 

$

76

 

Other operating expense

 

 

(2,150

)

 

 

(736

)

Other income (expense)

 

 

1

 

 

 

2

 

Net income (loss)

 

$

1,060

 

 

$

(658

)

Company’s equity in income (loss) of unconsolidated entities

 

$

701

 

 

$

74

 

 

Variable Interest Entities
Variable Interest Entities

8.

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 not owned in the accompanying consolidated balance sheets.

We analyze each of our land option agreements and other similar contracts under the provisions of ASC 810 Consolidation 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 as real estate inventory not owned included in our real estate inventories, its liabilities as debt (nonrecourse) held by VIEs in accrued expenses and other liabilities and the net equity of the VIE owners as noncontrolling interests on our consolidated balance sheets. 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):

 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

 

 

 

 

Remaining

 

 

Consolidated

 

 

 

 

 

 

Remaining

 

 

Consolidated

 

 

 

 

 

 

 

Purchase

 

 

Inventory

 

 

 

 

 

 

Purchase

 

 

Inventory

 

 

 

Deposits

 

 

Price

 

 

Held by VIEs

 

 

Deposits

 

 

Price

 

 

Held by VIEs

 

Consolidated VIEs

 

$

6,465

 

 

$

27,964

 

 

$

33,940

 

 

$

3,003

 

 

$

23,239

 

 

$

26,208

 

Unconsolidated VIEs

 

 

4,164

 

 

 

94,843

 

 

N/A

 

 

 

11,615

 

 

 

74,590

 

 

N/A

 

Other land option agreements

 

 

20,114

 

 

 

257,886

 

 

N/A

 

 

 

27,440

 

 

 

279,612

 

 

N/A

 

Total

 

$

30,743

 

 

$

380,693

 

 

$

33,940

 

 

$

42,058

 

 

$

377,441

 

 

$

26,208

 

 

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.

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 $8.0 million and $5.0 million as of March 31, 2016 and December 31, 2015, respectively. These pre-acquisition costs were included in real estate inventories as land under development on our consolidated balance sheets.  

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets

9.

Goodwill and Other Intangible Assets

In connection with the Merger, $139.3 million of goodwill has been recorded as of March 31, 2016.  

We have two intangible assets recorded as of March 31, 2016, comprised of an existing trade name from the acquisition of Maracay Homes in 2006, which has a 20 year useful life, and a TRI Pointe Homes trade name resulting from the Merger in 2014 which has an indefinite useful life.

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

 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Goodwill

 

$

139,304

 

 

$

 

 

$

139,304

 

 

$

139,304

 

 

$

 

 

$

139,304

 

Trade names

 

 

27,979

 

 

 

(5,388

)

 

 

22,591

 

 

 

27,979

 

 

 

(5,254

)

 

 

22,725

 

Total

 

$

167,283

 

 

$

(5,388

)

 

$

161,895

 

 

$

167,283

 

 

$

(5,254

)

 

$

162,029

 

 

The remaining useful life of our amortizing intangible asset related to the Maracay Homes trade name was 9.9 and 10.2 years as of March 31, 2016 and December 31, 2015, respectively. Amortization expense related to this intangible asset was $134,000 for each of the three month periods ended March 31, 2016 and 2015, respectively.  Amortization of this intangible asset was charged to sales and marketing expense.  Our $17.3 million indefinite life intangible asset related to the TRI Pointe Homes trade name is not amortizing.  All trade names are evaluated for impairment on an annual basis or more frequently if indicators of impairment exist.

Expected amortization of our intangible asset related to Maracay Homes for the remainder of 2016, the next four years and thereafter is (in thousands):

 

Remainder of 2016

 

$

400

 

2017

 

 

534

 

2018

 

 

534

 

2019

 

 

534

 

2020

 

 

534

 

Thereafter

 

 

2,755

 

Total

 

$

5,291

 

 

Other Assets
Other Assets

10.

Other Assets

Other assets consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Prepaid expenses

 

$

11,787

 

 

$

14,523

 

Refundable fees and other deposits

 

 

16,891

 

 

 

17,056

 

Development rights, held for future use or sale

 

 

4,360

 

 

 

4,360

 

Deferred loan costs - unsecured revolving credit facility

 

 

2,128

 

 

 

2,179

 

Operating properties and equipment, net

 

 

7,453

 

 

 

7,643

 

Other

 

 

3,299

 

 

 

3,157

 

Total

 

$

45,918

 

 

$

48,918

 

 

Accrued Expenses and Other Liabilities
Accrued Expenses and Other Liabilities

11.

Accrued Expenses and Other Liabilities

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Accrued payroll and related costs

 

$

13,502

 

 

$

28,264

 

Warranty reserves (Note 14)

 

 

45,419

 

 

 

45,948

 

Estimated cost for completion of real estate inventories

 

 

49,221

 

 

 

52,818

 

Customer deposits

 

 

15,422

 

 

 

12,132

 

Debt (nonrecourse) held by VIEs

 

 

2,310

 

 

 

2,442

 

Income tax liability to Weyerhaeuser (Note 17)

 

 

8,975

 

 

 

8,900

 

Accrued income taxes payable

 

 

11,015

 

 

 

19,279

 

Liability for uncertain tax positions (Note 16)

 

 

307

 

 

 

307

 

Accrued interest

 

 

13,937

 

 

 

2,417

 

Accrued insurance expense

 

 

1,408

 

 

 

1,402

 

Other tax liability

 

 

23,477

 

 

 

21,764

 

Other

 

 

16,309

 

 

 

20,590

 

Total

 

$

201,302

 

 

$

216,263

 

 

Senior Notes, Unsecured Revolving Credit Facility and Seller Financed Loans
Senior Notes, Unsecured Revolving Credit Facility and Seller Financed Loans

12.

Senior Notes, Unsecured Revolving Credit Facility and Seller Financed Loans

Senior Notes

The Senior Notes consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

4.375% Senior Notes due June 15, 2019

 

$

450,000

 

 

$

450,000

 

5.875% Senior Notes due June 15, 2024

 

 

450,000

 

 

 

450,000

 

Discount and deferred loan costs

 

 

(30,061

)

 

 

(31,321

)

Total

 

$

869,939

 

 

$

868,679

 

 

On the Closing Date, TRI Pointe assumed WRECO’s obligations as issuer of the Senior 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 $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.

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 March 31, 2016, no principal has been paid on the Senior Notes, and there was $19.5 million of capitalized debt financing costs, included in senior notes 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 and $1.9 million as of March 31, 2016 and December 31, 2015, respectively.

Unsecured Revolving Credit Facility

Unsecured revolving credit facility consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Unsecured revolving credit facility

 

$

374,392

 

 

$

299,392

 

 

In May 2015, the Company amended its unsecured revolving credit facility (the “Credit Facility”) from $425 million to $550 million.  The Credit Facility matures on May 18, 2019, and contains a sublimit of $75 million for letters of credit. The Company may borrow under the Credit Facility in the ordinary course of business to fund its operations, including its land development and homebuilding activities. Borrowings under the Credit Facility will be governed by, among other things, a borrowing base. Interest rates on borrowings under the Credit Facility will be based on either a daily Eurocurrency base rate or a Eurocurrency rate, in either case, plus a spread ranging from 1.45% to 2.20%, depending on the Company’s leverage ratio. As of March 31, 2016, the outstanding balance under the Credit Facility was $374.4 million with an interest rate of 2.13% per annum and $170.3 million of availability after considering the borrowing base provisions and outstanding letters of credit.  As of March 31, 2016 there was $2.1 million of capitalized debt financing costs, included in Other Assets on our consolidated balance sheet, related to the Credit Facility that will amortize over the life of the Credit Facility, maturing on May 18, 2019.  Accrued interest related to the Credit Facility was $484,000 and $407,000 as of March 31, 2016 and December 31, 2015, respectively.

At March 31, 2016 we had outstanding letters of credit of $5.3 million.  These letters of credit were issued to secure various financial obligations.  We believe it is not probable that any outstanding letters of credit will be drawn upon.

Seller Financed Loans

Seller financed loans consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Seller financed loans

 

$

 

 

$

2,434

 

 

Accrued interest on the seller financed loans outstanding as of December 31, 2015 was $89,000.

Interest Incurred

During the three month periods ended March 31, 2016 and 2015, the Company incurred interest of $15.1 million and $15.2 million, respectively, related to all debt during the period. All interest incurred was capitalized to inventory for the three month periods ended March 31, 2016 and 2015, respectively. Included in interest incurred was amortization of deferred financing and Senior Note discount costs of $1.3 million and $1.2 million for the three months ended March 31, 2016 and 2015, respectively.  Accrued interest related to all outstanding debt at March 31, 2016 and December 31, 2015 was $13.9 million and $2.4 million, respectively.  

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 Credit 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 March 31, 2016 and December 31, 2015.

Fair Value Disclosures
Fair Value Disclosures

13.

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

A summary of assets and liabilities at March 31, 2016 and December 31, 2015, related to our financial instruments, measured at fair value on a recurring basis, is set forth below (in thousands):

 

 

 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

Hierarchy

 

Book Value

 

 

Fair Value

 

 

Book Value

 

 

Fair Value

 

Senior Notes (1)

 

Level 2

 

 

889,456

 

 

 

894,375

 

 

 

889,054

 

 

 

881,460

 

Unsecured revolving credit facility (2)

 

Level 2

 

 

374,392

 

 

 

374,392

 

 

 

299,392

 

 

 

299,392

 

Seller financed loans

 

Level 2

 

 

 

 

 

 

 

 

2,434

 

 

 

2,368

 

 __________

(1)

The estimated fair value of the Senior Notes at March 31, 2016 and December 31, 2015 is based on quoted market prices.

(2)

We believe that the carrying value of the Credit Facility approximates fair value based on the short term nature of the current market rate amended on May 18, 2015.

 

At March 31, 2016 and December 31, 2015, the carrying value of cash and cash equivalents and receivables approximated fair value.

 

Fair Value of Nonfinancial Assets

Nonfinancial assets include items such as real estate inventories and long-lived assets that are measured at fair value on a nonrecurring basis when events and circumstances indicate 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):

 

 

 

 

 

Three Months Ended

 

 

Year Ended

 

 

 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

Fair Value

 

 

 

 

 

 

Fair Value

 

 

 

 

 

Impairment

 

 

Net of

 

 

Impairment

 

 

Net of

 

 

 

 

 

Charge

 

 

Impairment

 

 

Charge

 

 

Impairment

 

Real estate inventories (1)

 

 

 

$

 

 

$

 

 

$

1,167

 

 

$

28,540

 

__________

(1)

Fair value of real estate inventories, net of impairment charges represents only those assets whose carrying values were adjusted to fair value in the respective periods presented. The fair value of these real estate inventories impaired was determined based on recent offers received from outside third parties or actual contracts.

Commitments and Contingencies
Commitments and Contingencies

14.

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. Accordingly, it is possible that the ultimate outcome of any matter, if in excess of a related accrual or if no accrual was made, could be material to our financial statements.  For matters as to which the Company believes a loss is probable and reasonably estimable, it had legal reserves of $400,000 and $450,000 as of March 31, 2016 and December 31, 2015, respectively.

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. Included in our warranty reserve accrual are allowances to cover our estimated costs of self-insured retentions and deductible amounts under these policies and estimated costs for claims that may not be covered by applicable insurance or indemnities.  Estimation of these accruals include consideration of our claims history, including current claims and estimates of claims incurred but not yet reported.  In addition, we record expected recoveries from insurance carriers when proceeds are probable and estimable.  Outstanding warranty insurance receivables were $10.4 million and $10.5 million as of March 31, 2016 and December 31, 2015, 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):