T R I P O I N T E G R O U P , I N C .
A N N U A L R E P O R T 2 0 1 8
W H O W E A R E
Headquartered in Irvine, California, TRI Pointe Group, Inc. (NYSE: TPH) is a family of premium regional
homebuilders that design, build and sell homes in major U.S. markets. As one of the largest homebuilding
companies in the United States, TRI Pointe Group combines the resources and leadership of a national
organization with the regional insights, community ties and agility of local homebuilders.
The TRI Pointe Group family includes Maracay in Arizona, Pardee Homes in California and Nevada,
Quadrant Homes in Washington, Trendmaker Homes in Texas, TRI Pointe Homes in California,
Colorado, and North Carolina, and Winchester Homes in the Washington, D.C. area.
F I N A N C I A L A N D O P E R A T I O N A L H I G H L I G H T S
(dollars in thousands except earnings per share)
K E Y I N C O M E S T A T E M E N T D A T A
Home Sales Revenue
Homebuilding Gross Margin %
SG&A Expense as a % of Home Sales Revenue
Homebuilding Income from Operations
Net Income Available to Stockholders
Diluted Earnings per Share
2 0 1 8
$3,244,087
21.8%
10.6%
$353,204
$269,911
$1.81
2 0 1 7
$2,732,299
20.5%
10.1%
$343,634
$187,191
$1.21
K E Y B A L A N C E S H E E T D A T A
1 2 / 3 1 / 2 0 1 8
1 2 / 3 1 / 2 0 1 7
Cash and Cash Equivalents
Real Estate Inventories
Lots Owned or Controlled
Total Debt
Total Stockholders’ Equity
Ratio of Debt-to-Capital
O T H E R D A T A
Net New Home Orders
New Homes Delivered
Average Sales Price of Homes Delivered
Backlog of Homes at Fiscal Year End
Backlog Dollar Value at Fiscal Year End
2
$277,696
$3,216,059
27,740
$1,410,804
$2,056,924
40.7%
2 0 1 8
4,686
5,071
$640
1,335
$282,914
$3,105,553
27,312
$1,471,302
$1,929,722
43.3%
2 0 1 7
5,075
4,697
$582
1,571
$897,343
$1,032,775
4%
active adult
20%
luxury
26%
entry-level
50%
move-up
5
1
0
2
6
1
0
2
7
1
0
2
8
1
0
2
$2 , 291
$2 , 329
$2 ,732
$3 , 24 4
2018 % Orders by Segment
Home Sales Revenue (dollars in millions)
10.4%
2 0 1 5
10.8%
2 0 1 6
10.1%
2 0 1 7
10.6%
2 0 1 8
Sales, General & Administrative Expenses as a % of Home Sales Revenue
4,057
2 0 1 5
4,211
2 0 1 6
4,697
2 0 1 7
5,071
2 0 1 8
New Homes Delivered
21.1%
2 0 1 5
21.2%
2 0 1 6
20.5%
2 0 1 7
21.8%
2 0 1 8
Homebuilding
Gross Margin
Absorption per
Community per Month
4.0
3.0
2.0
1.0
Average Selling
Communities
130
122
114
106
98
90
2 0 1 5
2 0 1 6
2 0 1 7
2 0 1 8
3
VISTA DEL MAR, PARDEE HOMES SAN DIEGO
2 0 1 8 L E T T E R T O T H E
S T O C K H O L D E R S
2018 was a banner year for TRI Pointe Group as the company
prospective land deals may be land banked and/or ventured
achieved several milestones and posted record results in a
with our builder partners to reduce our up-front capital and
number of key metrics. We eclipsed the $3 billion mark in home
improve our risk-adjusted returns. As a result of these efforts,
sales revenue for the year for the first time in our company’s
we expect to generate significant cash flow from operations,
ten-year history by delivering a record 5,071 homes at an
which we may use to reduce our leverage, buy back shares or
average sales price of approximately $640,000. We generated
make opportunistic land purchases or M&A activity in the
homebuilding gross margin of 21.8% for the year, representing
future. We ended the year in excellent financial condition, with a
a 130 basis point improvement from the previous year. These
homebuilding net-debt-to-net-capital ratio of 35.5%*, allowing
improvements to both revenue and margin, coupled with the
us to be opportunistic with continued expansion while managing
benefit of a lower tax rate, resulted in diluted earnings per
through changing market conditions.
share of $1.81 for the year, a 50% increase over 2017.
While our full-year results underscore the strength of our
operations and the appeal of our home offerings, the market as
a whole experienced a slowdown in the second half of 2018 as
home price appreciation and a sharp rise in mortgage interest
rates created a more challenging demand environment for our
industry. Order pace slowed in certain markets as potential
home buyers became more deliberate in their decision-making
process. Over the course of a housing cycle, slowdowns such as
this are normal. Given the strong underlying fundamentals of
our industry, we do not believe we are headed for a prolonged
downturn. With that said, we realize that the housing market
has changed and as a result, TRI Pointe Group is proactively
adapting to compete effectively in this new environment. The
following are some of the key areas of focus we believe will
help position TRI Pointe Group for long-term success.
O P E R A T I O N A L E X C E L L E N C E
P R E M I U M B R A N D P E R C E P T I O N
TRI Pointe’s strategy is to position each of our six homebuilding
brands — Maracay, Pardee Homes, Quadrant Homes, Trendmaker
Homes, TRI Pointe Homes and Winchester Homes — as a
premium builder within its markets. Our goal is to establish our
brands as a cut above the competition, a builder of choice,
focused on design, innovation and a great customer experience.
This type of reputation takes years to cultivate, but it starts with
building quality homes and having our finger on the pulse of what
our customers want and dream about in their homes and in their
lives. This doesn’t mean being the highest priced builder, but
rather the builder who offers the best value and the most desired
product in every segment. We have made significant strides in
our product design in entry-level, move-up, luxury and active
adult segments as we believe that there are ways to differentiate
our homes, at every segment of the market, and by doing so we
can reinforce our premium brand perception.
At TRI Pointe, we strive to achieve operational excellence in
N E W M A R K E T E X P A N S I O N
every facet of our business. To better realize our sales goals, we
have implemented a 12-point sales and marketing program that
focuses on lead conversion by creating an emotional connection
with our entry-level, move-up, luxury and active-adult buyers.
With respect to cost, we have increased the level of scrutiny on
a number of expense areas for our company, which means
renegotiating terms with land sellers, vendors, trade partners
and suppliers, and tasking our department heads to lower costs.
In terms of land underwriting, we continue to incorporate a
more conservative and disciplined approach. In some cases,
We believe stockholder value is created with a long-term focus
on growing both the top and bottom line. We are very proud of
the fact that within 10 years of our founding, we eclipsed the $3
billion revenue mark and produced pretax income of $362
million for the year. Over the next decade, we would like to
double our annual revenue while maintaining a healthy level of
profitability. We planted the seeds for some of this future
growth in October 2018 when we announced our greenfield
expansion into the Carolinas. Shortly thereafter, we announced
the acquisition of Dunhill Homes in the Dallas-Fort Worth
4
S E T T I N G T H E F O U N D A T I O N
2009
TRI Pointe Homes was formed and
began operations in Southern California
First public offering of a
homebuilder in over 10 years
2013
2014
WRECO transaction closes
Launched TRI Pointe Connect and TRI Pointe
Assurance for mortgage and title services
2014 Developer of the Year Award1
2015 Homebuilder of the Year Award2
#1 Rated Local Management Teams3
Trendmaker expanded into the Austin market
Millennial “Responsive Home” completed
2015
2016
HIVE 100 Innovators Award4
Best Places to Work Award5
market. These strategic moves now give us a foothold in two
of the best homebuilding markets in the country and further
diversify our geographic presence. In addition, they give us a
broader platform from which to grow our operations and
increase our scale.
In summary, we feel very optimistic about the long-term
outlook for TRI Pointe Group. 2018 was an outstanding year
for our company in terms of home sales revenue and earnings
per share growth, together with recognition earned by our
experienced management team and employees for continued
excellence in customer satisfaction and employee
engagement. Our company continues to evolve to address
the needs of today’s homebuyers while cultivating a premium
brand perception.
Finally, we would like to thank our team members for their
collective contributions to a strong 2018, our Board of
Directors for their continued guidance and our stockholders
for their ongoing support. TRI Pointe Group has come a long
Best Places to Work Award5
way since its founding 10 years ago, and we are as proud and
TRI Pointe Homes expanded into Sacramento
excited as ever to serve as its Chairman and Chief Executive.
FORTUNE 100 Fastest-Growing Companies6
2017
Sincerely,
2018
Best Places to Work Award7
TRI Pointe Homes expanded
into the Carolinas
Dunhill and Nathan Carlisle Homes
acquired and become Trendmaker Homes’
Dallas-Fort Worth Division
1 Builder and Developer magazine, a national homebuilding publication, named TRI Pointe
the Developer of the Year in 2014.
2 BUILDER magazine named TRI Pointe Group the Builder of the Year in 2015. The Builder
of the Year Award is BUILDER magazine’s highest yearly honor.
3 Leading homebuilding analyst firm Zelman & Associates found TRI Pointe Group to
have the highest-rated local management teams among public homebuilders in its 2015
survey of land developers and private homebuilders.
4 Recognizing housing’s most influential innovators, real estate media firm Hanley
Wood awarded TRI Pointe Group with a HIVE 100 Innovators award in the Business
Management category.
5 Orange County Business Journal and Best Companies Group recognized TRI Pointe Group
as one of the Best Places to Work in Orange County in 2016 and 2017.
6 FORTUNE named TRI Pointe Group among the 100 Fastest-Growing Companies based
on top three-year performances in revenues, profits and stock returns.
7 10 TRI Pointe Group divisions received this honor from Best Companies Group and
their local publication in regions and cities where it is awarded.
This letter to stockholders contains “forward-looking statements.” Please refer to the
Cautionary Note Concerning Forward-Looking Statements in the accompanying annual
report on Form 10-K.
5
Steven J. Gilbert
Chairman of the Board
Douglas F. Bauer
Chief Executi ve Offi cer
* The ratio of net-debt-to-net-capital is a non-GAAP financial measure. For a reconciliation
to the most directly comparable GAAP financial measure, please see “Liquidity and Capital
Resources-Leverage Ratios” in Item 7 – Management’s Discussion and Analysis of Financial
Condition and Results of Operations of this Annual Report.
BIRCHWOOD AT BRAMBLETON, WINCHESTER HOMES
ELAN AT ALTIS, PARDEE HOMES INLAND EMPIRE
SENDERO, PARDEE HOMES SAN DIEGO
LYRIC AT CADENCE PARK,
TRI POINTE HOMES SOUTHERN CALIFORNIA
PALOMA CREEK, TRENDMAKER HOMES DALLAS–FORT WORTH
6
MARATHON RANCH, MARACAY
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-K
_______________________________________________________________________________
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-35796
TRI Pointe Group, Inc.
(Exact Name of Registrant as Specified in Its Charter)
_______________________________________________________________________________
Delaware
(State or other Jurisdiction of Incorporation or Organization)
61-1763235
(I.R.S. Employer Identification No.)
19540 Jamboree Road, Suite 300
Irvine, California 92612
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (949) 438-1400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange on which registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes
No
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2018, based on the closing price of $16.36 as
reported by the New York Stock Exchange, was $2,448,101,287.
141,669,513 shares of common stock were issued and outstanding as of February 8, 2019.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions from the registrant’s proxy statement relating to its 2019 annual meeting of stockholders are incorporated by reference into Part III, Items 10, 11,
12, 13 and 14.
[This Page Intentionally Left Blank]
TRI Pointe Group, Inc.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2018
Table of Contents
Page
Number
4
21
40
40
40
40
41
43
45
65
65
65
65
68
68
68
68
68
68
69
111
111
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
Part I
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Item 13.
Item 14.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Party Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Item 16.
Exhibits, Financial Statements and Financial Statement Schedules
Form 10-K Summary
Signatures
Part IV
- 1 -
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains certain statements that are “forward-looking” statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are based on our current intentions, beliefs,
expectations and predictions for the future, and you should not place undue reliance on these statements. These statements use
forward-looking terminology, are based on various assumptions made by us, and may not be accurate because of risks and
uncertainties surrounding the assumptions that are made.
Factors listed in this section–as well as other factors–may cause actual results to differ significantly from the forward-
looking statements included in this annual report on Form 10-K. There is no guarantee that any of the events anticipated by the
forward-looking statements in this annual report on Form 10-K will occur, or if any of the events occurs, there is no guarantee
what effect it will have on our operations, financial condition, or share price.
We undertake no, and hereby disclaim any, obligation to update or revise any forward-looking statements, unless
required by law. However, we reserve the right to make such updates or revisions from time to time by press release, periodic
report, or other method of public disclosure without the need for specific reference to this annual report on Form 10-K. No
update or revision shall be deemed to indicate that other statements not addressed by that update or revision remain correct or
create an obligation to provide any other updates or revisions.
Forward-Looking Statements
Forward-looking statements that are included in this annual report on Form 10-K are generally accompanied by words
such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “future,” “goal,” “intend,” “likely,” “may,” “might,” “plan,”
“potential,” “predict,” “project,” “should,” “strategy,” “target,” “will,” “would,” or other words that convey the uncertainty of
future events or outcomes. These forward-looking statements may include, but are not limited to, statements regarding our
strategy, projections and estimates concerning the timing and success of specific projects and our future production, land and
lot sales, outcome of legal proceedings, operational and financial results, including our estimates for growth, financial
condition, sales prices, prospects and capital spending.
Risks, Uncertainties and Assumptions
The major risks and uncertainties–and assumptions that are made–that affect our business and may cause actual results to
differ from these forward-looking statements include, but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the effect of general economic conditions, including employment rates, housing starts, interest rate levels,
availability of financing for home mortgages and strength of the U.S. dollar;
market demand for our products, which is related to the strength of the various U.S. business segments and U.S.
and international economic conditions;
levels of competition;
the successful execution of our internal performance plans, including any restructuring and cost reduction
initiatives;
global economic conditions;
raw material prices;
oil and other energy prices;
the effect of weather, including the re-occurrence of drought conditions in California;
the risk of loss from earthquakes, volcanoes, fires, floods, droughts, windstorms, hurricanes, pest infestations
and other natural disasters, and the risk of delays, reduced consumer demand, and shortages and price increases
in labor or materials associated with such natural disasters;
transportation costs;
federal and state tax policies;
the effect of land use, environment and other governmental laws and regulations;
legal proceedings or disputes and the adequacy of reserves;
risks relating to any unforeseen changes to or effects on liabilities, future capital expenditures, revenues,
expenses, earnings, synergies, indebtedness, financial condition, losses and future prospects;
changes in accounting principles;
risks related to unauthorized access to our computer systems, theft of our homebuyers’ confidential information
or other forms of cyber-attack; and
other factors described in “Risk Factors.”
- 2 -
As used in this annual report on Form 10-K, references to “TRI Pointe”, “the Company”, “we”, “us”, or “our” in this
annual report on Form 10-K (including in the consolidated financial statements and related notes thereto in this annual report
on Form 10-K) refer to TRI Pointe Group, Inc., a Delaware corporation (“TRI Pointe Group”) and its subsidiaries.
EXPLANATORY NOTE
- 3 -
Item 1.
Business
Our Company
PART I.
TRI Pointe was founded in April 2009, near the end of an unprecedented downturn in the national homebuilding
industry. Since then, we have grown from a Southern California fee homebuilder into a regionally focused national
homebuilder with a portfolio of the following six quality homebuilding brands operating in 15 markets across ten states:
•
•
•
•
•
•
Maracay in Arizona;
Pardee Homes in California and Nevada;
Quadrant Homes in Washington;
Trendmaker Homes in Texas;
TRI Pointe Homes in California, Colorado and the Carolinas; and
Winchester Homes in Maryland and Virginia.
Our growth strategy is to capitalize on high demand in selected "core" markets with favorable population and
employment growth as a result of proximity to job centers or primary transportation corridors. As of December 31, 2018, our
operations consisted of 146 active selling communities and 27,740 lots owned or controlled. See “Lots Owned or Controlled”
below. Our construction expertise across an extensive product offering allows us flexibility to pursue a wide array of land
acquisition opportunities and appeal to a broad range of potential homebuyers, including buyers of entry-level, move-up, luxury
and active adult homes. As a result, we build across a variety of base sales price points, ranging from approximately $200,000
to $2.2 million, and home sizes, ranging from approximately 1,000 to 5,500 square feet. See “Description of Projects and
Communities under Development” below. For the years ended December 31, 2018 and 2017, we delivered 5,071 and 4,697
homes, respectively, and the average sales price of our new homes delivered was approximately $640,000 and $582,000,
respectively.
In October 2018, we announced the expansion of our TRI Pointe Homes brand into the southeast region with the launch
of a new division in the Carolinas. In December 2018, we announced the acquisition of Dunhill Homes, LLC, which extended
our homebuilding presence in Texas to the Dallas–Fort Worth region. Dunhill Homes began operating under our Trendmaker
Homes name on January 1, 2019.
Our founders firmly established our core values of quality, integrity and excellence. These are the driving forces behind
our innovative designs and strong commitment to our homebuyers.
Our Competitive Strengths
We believe the following strengths provide us with a significant competitive advantage in implementing our business
strategy:
Experienced and Proven Leadership
Douglas Bauer, our Chief Executive Officer, Thomas Mitchell, our President and Chief Operating Officer, and Michael
Grubbs, our Chief Financial Officer, have worked together for over 29 years and have a successful track record of managing
and growing a public homebuilding company. Spanning over a century, their combined real estate industry experience includes
land acquisition, financing, entitlement, development, construction, marketing and sales of single-family detached and attached
homes in communities in a variety of markets. In addition, the management teams at each of our homebuilding subsidiaries
have substantial industry knowledge and local market expertise. We believe that our management teams’ prior experience,
extensive relationships and strong local reputations provide us with a competitive advantage in securing projects, obtaining
entitlements, building quality homes and completing projects within budget and on schedule.
Focus on High Growth Core Markets
Our business is well-positioned to continue to capitalize on the broader national housing market. We are focused on the
design, construction and sale of innovative single-family detached and attached homes in major metropolitan areas in Arizona,
California, Colorado, the Carolinas, Texas, Nevada, the Washington, D.C. metro area, and Washington State. These markets are
generally characterized by high job growth and increasing populations, creating strong demand for new housing. We believe
they represent attractive homebuilding markets with opportunities for long-term growth and that we have strong land positions
strategically located within these markets. Moreover, our management teams have deep, local market knowledge of the
homebuilding and development industries. We believe this experience and strong relationships with local market participants
enable us to source, acquire and entitle land efficiently.
- 4 -
Strong Operational Discipline and Controls
Our management teams pursue a hands-on approach. Our strict operating discipline, including financial accountability at
the project management level, is a key part of our strategy to maximize returns while minimizing risk.
Acquire Attractive Land Positions While Reducing Risk
We believe that our reputation and extensive relationships with land sellers, master plan developers, financial
institutions, brokers and other builders enable us to continue to acquire well-positioned land parcels in our target markets and
provide us access to a greater number of acquisition opportunities. We believe our expertise in land development and planning
enables us to create desirable communities that meet or exceed our homebuyers’ expectations, while operating at competitive
costs.
Increase Market Position in Growth Markets
We believe that there are opportunities to expand profitably in our existing and target markets, and we continually review
our selection of markets based on both aggregate demographic information and our own operating results. We use the results of
these reviews to re-allocate our investments to those markets where we believe we can maximize our profitability and return on
capital. While our primary growth strategy has focused on increasing our market position in our existing markets, we recently
expanded our homebuilding operations to the Carolinas and the Dallas–Fort Worth region in Texas. We may continue, on an
opportunistic basis, to explore expansion into other markets through organic growth or acquisition.
Provide Superior Design and Homeowner Experience and Service
We consider ourselves a “progressive” homebuilder driven by an exemplary homeowner experience, cutting-edge
product development and exceptional execution. Our core operating philosophy is to provide a positive, memorable experience
to our homeowners through active engagement in the building process, tailoring our product to homeowners’ lifestyle needs and
enhancing communication, knowledge and satisfaction. We believe that the new generation of home buying families has
different ideas about the kind of home buying experience it wants. As a result, our selling process focuses on the home’s
features, benefits, quality and design in addition to the traditional metrics of price and square footage. In addition, we devote
significant resources to the research and design of our homes to better meet the needs of our homebuyers. Through our
LivingSmart® platform, we provide homes that we believe are earth-friendly, enhance homeowners’ comfort, promote a
healthier lifestyle and deliver tangible operating cost savings versus less efficient resale homes. Collectively, we believe these
steps enhance the selling process, lead to a more satisfied homeowner and increase the number of homebuyers referred to our
communities.
Offer a Diverse Range of Products
We are a builder with a wide variety of product offerings that enable us to meet the specific needs of each of our core
markets, which we believe provides us with a balanced portfolio and an opportunity to increase market share. We have
demonstrated expertise in effectively building homes across product offerings from entry-level through luxury and active
adult. We spend extensive time studying and designing our products through the use of architects, consultants and homebuyer
focus groups for all levels and price points in our target markets. We believe our diversified product strategy enables us to best
serve a wide range of homebuyers, adapt quickly to changing market conditions and optimize performance and returns while
strategically reducing portfolio risk. Within each of our core markets we determine the profile of homebuyers we hope to
address and design neighborhoods and homes with the specific needs of those homebuyers in mind.
Focus on Efficient Cost Structure and Target Attractive Returns
Our experienced management teams are vigilant in maintaining their focus on controlling costs. We competitively bid
new projects and phases while maintaining strong relationships with our trade partners by managing production schedules
closely and paying our vendors on time.
We combine decentralized management in those aspects of our business in which we believe detailed knowledge of local
market conditions is critical (such as governmental processing, construction, land acquisition, land development and sales and
marketing), with centralized management in those functions in which we believe central control is required (such as approval of
land acquisitions, financial, treasury, human resources and legal matters). We have also made significant investments in
systems and infrastructure to operate our business efficiently and to support the planned future growth of our company as a
result of executing our expansion strategy.
- 5 -
Utilize Prudent Leverage
Our ongoing financial strategy includes redeployment of cash flows from continuing operations and debt to provide us
with the financial flexibility to access capital on the best terms available. In that regard, we expect to employ prudent levels of
leverage to finance the acquisition and development of our lots and construction of our homes. See “Our Financing Strategy”
below.
Lots Owned or Controlled
As of December 31, 2018, we owned or controlled, pursuant to land option contracts or purchase contracts, an aggregate
of 27,740 lots. We refer to lots that are under land option contracts as “controlled.” See “Acquisition Process” below. Excluded
from lots owned or controlled are investments described in Note 6, Investments in Unconsolidated Entities, of the notes to our
consolidated financial statements included elsewhere in this annual report on Form 10-K. The following table presents certain
information with respect to our lots owned or controlled as of December 31, 2018.
Maracay
Pardee Homes
Quadrant Homes
Trendmaker Homes
TRI Pointe Homes
Winchester Homes
Total
Lots
Owned
Lots
Controlled
Lots
Owned or
Controlled
2,346
13,700
883
1,661
3,150
1,317
23,057
962
676
861
831
945
408
4,683
3,308
14,376
1,744
2,492
4,095
1,725
27,740
Description of Projects and Communities under Development
Our lot inventory includes land that we are holding for future development. The development of these lots will be
subject to a variety of marketing, regulatory and other factors and in some cases we may decide to sell the land prior to
development. The following table presents project information relating to each of our markets as of December 31, 2018 and
includes information on current projects under development where we are building and selling homes as of December 31, 2018.
- 6 -
Maracay
County, Project, City
Phoenix, Arizona
City of Buckeye:
Verrado Victory
Arroyo Seco
City of Chandler:
Hawthorn Manor
Mission Estates
Windermere Ranch
City of Gilbert:
The Preserve at Adora Trails
Marathon Ranch
Lakes At Annecy
Annecy P3
Lakeview Trails
Copper Bend
Hamstra Assemblage
City of Goodyear:
Villages at Rio Paseo
Cottages at Rio Paseo
City of Mesa:
Kinetic Point at Eastmark
Curie Court at Eastmark
The Vista at Granite Crossing
Electron at Eastmark
City of Peoria:
Legacy at The Meadows
Estates at The Meadows
Enclave at The Meadows
Deseo
City of Phoenix:
Navarro Groves
Loma @ Avance
Ranger @ Avance
Piedmont @ Avance
Alta @ Avance
Town of Queen Creek:
Spur Cross
Closed Communities
Phoenix, Arizona Total
Tucson, Arizona
Oro Valley:
Desert Crest - Center Pointe Vistoso
The Cove - Center Pointe Vistoso
Summit N & S - Center Pointe Vistoso
The Pinnacle - Center Pointe Vistoso
Closed Communities
Tucson, Arizona Total
Maracay Total
Year of
First
Delivery(1)
Total
Number of
Lots(2)
Cumulative
Homes
Delivered
as of
December 31,
2018
Lots
Owned as of
December 31,
2018(3)
Backlog as of
December 31,
2018(4)(5)
Homes
Delivered
for the Twelve
Months Ended
December 31,
2018
Sales Price
Range(in thousa
nds)(6)
18
44
25
26
91
—
54
216
250
92
38
332
99
62
—
—
12
53
8
172
97
94
30
124
143
101
26
118
—
2,325
16
1
3
1
—
21
2,346
5
—
11
3
—
—
27
—
—
—
—
—
1
8
—
—
11
11
2
41
8
—
17
—
—
—
—
—
—
145
2
1
3
—
—
6
151
$373 - $405
$406 - $458
$490 - $564
$530 - $590
$499 - $539
Closed
$513 - $556
$275 - $350
$226 - $301
$495 - $570
$451 - $484
$470 - $750
$190 - $219
$230 - $250
Closed
Closed
$438 - $513
$361 - $438
$425 - $451
$497 - $571
$375 - $470
$494 - $547
$439 - $484
$352 - $412
$398 - $466
$475 - $495
$595 - $625
$454 - $544
$262 - $307
$345 - $405
$397 - $432
$448 - $480
31
—
28
—
—
48
9
—
—
—
—
—
18
31
3
48
25
—
40
57
29
—
24
—
—
—
—
—
43
434
38
33
20
8
5
104
538
2015
2019
2017
2019
2019
2017
2018
2019
2020
2019
2019
2020
2018
2018
2013
2016
2018
2019
2017
2017
2018
2019
2018
2019
2019
2019
2019
2020
N/A
2016
2016
2016
2016
N/A
98
44
84
26
91
82
63
216
250
92
38
332
117
93
80
106
37
53
74
272
126
94
54
124
143
101
26
118
—
3,034
103
83
88
69
—
343
3,377
80
—
59
—
—
82
9
—
—
—
—
—
18
31
80
106
25
—
66
100
29
—
24
—
—
—
—
—
—
709
87
82
85
68
—
322
1,031
- 7 -
Pardee Homes
County, Project, City
California
San Diego County:
Almeria
Olvera
Vista Santa Fe
Sendero
Terraza
Carmel
Vista Del Mar
Pacific Highlands Ranch Future
Sandstone
Lake Ridge
Azul
Veraz
Moderna
Marea
Solmar
Solmar Sur
Meadowood
South Otay Mesa
Los Angeles County:
Verano
Arista
Cresta
Lyra
Sola
Skyline Ranch Future
Riverside County:
Vantage
Aura
Starling
Canyon Hills Future 70 x 115
Westlake
Elara
Daybreak
Cascade
Abrio
Beacon
Alisio
Vita
Avid
Elan
Mira
Sundance Future Active Adult
Avena
Tamarack
Braeburn
Canvas
Kadence
Newpark
Easton
Year of
First
Delivery(1)
Total
Number o
f Lots(2)
Cumulative
Homes
Delivered
as of
December 31,
2018
Lots
Owned as of
December 31,
2018(3)
Backlog as of
December 31,
2018(4)(5)
Homes
Delivered
for the Twelve
Months Ended
December 31,
2018
Sales Price
Range(in thous
ands)(6)
2017
2017
2019
2019
2019
2019
2019
2020
2018
2018
2017
2018
2018
2020
2019
TBD
TBD
TBD
2017
2017
2018
2019
2019
TBD
2016
2017
2017
TBD
2020
2016
2017
2017
2018
2018
2019
2019
2019
2019
2019
TBD
2018
2018
2018
2018
2018
2018
2018
80
84
44
112
81
105
79
115
81
129
121
111
44
135
74
108
845
893
95
143
67
84
73
913
101
100
68
125
163
248
189
151
138
106
84
111
72
101
90
330
84
84
82
89
85
93
92
75
84
—
—
—
—
—
—
49
34
121
10
10
—
—
—
—
—
37
68
10
—
—
—
99
97
40
—
—
202
74
100
32
18
—
—
—
—
—
—
25
55
8
8
8
8
5
- 8 -
5
—
44
112
81
105
79
115
32
95
—
101
34
135
74
108
845
893
58
75
57
84
73
913
2
3
28
125
163
46
115
51
106
88
84
111
72
101
90
330
59
29
74
81
77
85
87
5
—
—
24
19
18
11
—
10
21
—
—
—
—
—
—
—
—
7
4
12
10
16
—
—
2
5
—
—
13
4
17
4
24
—
13
9
4
7
—
7
7
—
1
1
5
2
60
69
$1,440 - $1,560
$1,315 - $1,470
— $1,780 - $1,895
— $1,150 - $1,295
— $1,260 - $1,370
— $1,380 - $1,490
— $1,530 - $1,700
— $1,800 - $1,900
49
34
57
10
10
—
—
—
—
—
28
38
15
—
—
—
47
49
25
—
—
83
49
73
32
18
—
—
—
—
—
—
25
55
8
8
8
8
5
$640 - $710
$710 - $860
$360 - $475
$380 - $460
$355 - $440
$370 - $470
$365 - $440
$365 - $440
$290 - $590
TBD
$560 - $670
$700 - $785
$790 - $890
$648 - $720
$545 - $580
$550 - $810
$390 - $410
$370 - $385
$425 - $430
TBD
$318 - $325
$300 - $330
$360 - $385
$315 - $330
$405 - $430
$465 - $520
$300 - $330
$310 - $335
$340 - $365
$410 - $440
$375 - $400
TBD
$450 - $475
$470 - $520
$420 - $450
$400 - $425
$420 - $440
$450 - $495
$475 - $530
Tournament Hills Future
Banning
San Joaquin County:
Bear Creek
Closed Communities
California Total
Nevada
Clark County:
North Peak
Castle Rock
Escala
Strada
Linea
Inspirada Town Center
Meridian
Pebble Estate Future
Encanto
Luma
Evolve
Corterra
Keystone
Cobalt
Onyx
Axis
Midnight Ridge
Pivot
Strada at Pivot
Nova Ridge
Tera Luna
Indogo
Larimar
Blackstone
Cirrus
Sandalwood
Closed Communities
Nevada Total
Pardee Total
TBD
2020
TBD
2015
2015
2016
2017
2018
2020
2016
TBD
2016
2018
2019
2018
2017
2017
2018
2017
2019
2017
2017
2017
2018
2018
2018
2018
2019
2020
N/A
268
4,344
1,252
—
13,266
176
183
64
143
123
160
62
8
51
63
74
112
70
124
71
78
104
88
27
108
116
202
170
140
54
117
—
—
—
—
—
1,277
175
179
63
59
48
—
61
—
49
41
—
3
63
46
14
33
—
44
25
39
4
22
4
5
—
—
—
268
4,344
1,252
—
11,989
1
4
1
84
75
160
1
8
2
22
74
109
7
78
57
45
104
44
2
69
112
180
166
135
54
117
—
—
—
—
—
282
—
—
—
—
23
—
1
—
—
7
—
8
1
6
2
12
—
9
1
18
5
10
4
13
—
—
—
TBD
TBD
TBD
$312 - $370
$365 - $455
$520 - $590
$420 - $470
$360 - $400
$375 - $480
$595 - $690
TBD
$475 - $530
$490 - $530
$280 - $300
$460 - $550
$465 - $550
$380 - $455
$450 - $485
$860 - $1,125
$540 - $585
$405 - $470
$450 - $480
$680 - $840
$545 - $660
$315 - $360
$380 - $420
$405 - $500
$350 - $375
$685 - $815
—
—
—
135
998
53
63
10
35
48
—
19
—
15
41
—
3
39
41
14
23
—
34
18
38
4
22
4
5
—
—
55
2,688
15,954
977
2,254
1,711
13,700
120
402
584
1,582
- 9 -
Quadrant Homes
County, Project, City
Washington
Snohomish County:
Greenstone Heights, Bothell
Grove North, Bothell
Grove South, Bothell
King County:
Vareze, Kirkland
Inglewood Landing, Sammamish
Jacobs Landing, Sammamish
Kirkwood Terrace, Sammamish
English Landing P1, Redmond
Cedar Landing, North Bend
Monarch Ridge, Sammamish
Overlook at Summit Park, Maple Valley
Ray Meadows, Redmond
Aurea, Sammamish
Aldea, Newcastle
Lario, Bellevue
Soundview, Federal Way
Eagles Glen, Sammamish
Finn Meadows, Kirkland
Pierce County:
Harbor Hill S-5/6, Gig Harbor
Harbor Hill S-2, Gig Harbor
Kitsap County:
Winslow Grove, Bainbridge Island
Blue Heron, Poulsbo
Closed Communities
Washington Total
Quadrant Homes Total
Year of
First
Delivery(1)
Total
Number of
Lots(2)
Cumulative
Homes
Delivered
as of
December 31,
2018
Lots
Owned as of
December 31,
2018(3)
Backlog as of
December 31,
2018(4)(5)
Homes
Delivered
for the Twelve
Months Ended
December 31,
2018
Sales Price
Range(in thous
ands)(6)
2017
2019
2019
2019
2019
2017
2018
2018
2019
2019
2019
2018
2019
2019
2019
2018
2019
2019
2017
2017
2018
2021
N/A
41
43
9
82
21
20
12
50
138
59
126
27
41
129
46
21
10
5
72
41
19
85
—
38
—
—
—
—
19
5
37
—
—
—
10
—
—
—
4
—
—
63
36
2
—
—
1,097
1,097
214
214
3
43
9
82
21
1
7
13
138
59
126
17
41
129
46
17
10
5
9
5
17
85
—
883
883
1
—
—
—
6
1
2
6
—
—
3
4
—
11
—
1
—
—
6
2
3
—
—
46
46
36
—
—
$885
$765 - $900
$785 - $820
—
$700 - $900
— $1,115 - $1,295
18
5
37
—
$1,160 - $1,280
$1,800 - $2,100
$1,195 - $1,425
$735 - $880
— $970 - $1,135
—
10
—
—
$590 - $745
$1,065 - $1,190
$710 - $860
$695 - $925
— $795 - $1,125
4
—
$531 - $660
$1,100 -
$2,000
— $900 - $1,049
$493
$465
$1,047 - $1,192
$474 - $649
N/A
40
29
2
—
178
359
359
- 10 -
Trendmaker Homes
County, Project, City
Texas
Brazoria County:
Pomona, Manvel
Rise Meridiana
Fort Bend County:
Cross Creek Ranch 60', Fulshear
Cross Creek Ranch 65', Fulshear
Cross Creek Ranch 70', Fulshear
Cross Creek Ranch 80', Fulshear
Cross Creek Ranch 90', Fulshear
Fulshear Run 1/2 Acre, Richmond
Harvest Green 75', Richmond
Sienna Plantation 85', Missouri City
Grayson Woods 60'
Grayson Woods 70'
Harris County:
The Groves, Humble
Lakes of Creekside
Balmoral 50'
Bridgeland '80, Cypress
Bridgeland 70'
Villas at Bridgeland 50'
Elyson 70', Cypress
Clear Lake, Houston
Montgomery County:
Woodtrace, Woodtrace
Northgrove, Tomball
Bender's Landing Estates, Spring
The Woodlands, Creekside Park
Royal Brook, Porter
Waller County:
LakeHouse
Williamson County:
Crystal Falls
Rancho Sienna 60'
Rancho Sienna 80'
Highlands at Mayfield Ranch 50'
Highlands at Mayfield Ranch 60'
Rancho Sienna 50'
Palmera Ridge
Hays County:
Belterra 60', Austin
Belterra 80', Austin
Headwaters, Dripping Springs
Travis County:
Lakes Edge 70'
Lakes Edge 80'
Collin County:
Miramonte, Frisco
Retreat at Craig Ranch, McKinney
Dallas County:
Vineyards, Rowlett
Year of
First
Delivery(1
)
Total
Number of
Lots(2)
Cumulative
Homes
Delivered
as of
December 31,
2018
Lots
Owned as of
December 31,
2018(3)
Backlog as of
December 31,
2018(4)(5)
Homes
Delivered
for the Twelve
Months Ended
December 31,
2018
Sales Price
Range(in thousa
nds)(6)
2015
2016
2013
2013
2013
2013
2013
2016
2015
2015
TBD
TBD
2015
2015
2019
2015
2018
2018
2016
2015
2014
2015
2014
2015
2019
TBD
2016
2016
2018
2018
2018
2019
2019
2017
2016
2017
2018
2018
2016
2012
2017
49
47
48
89
111
71
37
54
42
54
5
4
114
38
24
147
41
37
20
778
39
25
104
121
18
350
29
44
5
36
23
22
30
36
37
30
45
14
62
165
28
35
30
31
64
89
53
32
31
34
30
1
—
71
16
—
125
7
2
18
468
37
7
91
74
—
—
25
18
2
8
1
—
—
26
34
23
13
4
36
143
12
- 11 -
14
17
17
25
22
18
5
23
8
24
4
4
43
22
24
22
34
35
2
310
2
18
13
47
18
350
4
26
3
28
22
22
30
10
3
7
32
10
26
22
16
3
—
1
10
6
11
1
12
4
1
—
—
4
4
—
3
1
2
—
41
—
—
4
14
—
—
—
3
1
3
5
1
—
2
—
5
31
5
5
5
4
14
13
16
13
17
13
6
13
15
14
—
—
16
7
—
24
7
2
10
133
7
2
31
35
—
—
9
14
2
3
1
—
—
17
16
16
13
4
4
—
—
$375 - $471
$292 - $350
$370 - $470
$442 - $521
$490 - $561
$557 - $676
$695 - $759
$573 - $679
$446 - $543
$546 - $645
TBD
TBD
$311 - $524
$460 - $611
TBD
$549 - $636
$511 - $574
$324 - $390
$449 - $480
$346 - $663
$512 - $526
TBD
$511 - $584
$447 - $499
$416 - $432
TBD
TBD
$340 - $420
$456 - $517
$280 - $330
$340 - $406
$291 - $348
$270 - $324
$375 - $466
$535 - $603
$399 - $450
$652 - $792
$650 - $835
$485 - $570
$355 - $400
$371 - $480
Denton County:
Glenview, Frisco
Paloma Creek, Little Elm
Parks at Legacy, Prosper
Shadow Creek, Hickory Creek
Valencia, Little Elm
Villages of Carmel, Denton
Kaufman County:
Park Trails, Forney
Rockwall County:
Heath Golf and Yacht, Heath
Woodcreek, Fate
Tarrant County:
Chisholm Trail Ranch, Fort Worth
Lakes of River Trails, Fort Worth
Ventana, Benbrook
Closed Communities
Texas Total
Trendmaker Homes Total
2017
2017
2016
2016
2017
2015
2016
2017
2017
2011
2017
N/A
50
190
42
40
68
47
85
86
80
59
138
61
—
4,019
4,019
8
144
14
36
37
42
73
57
62
44
121
29
—
2,358
2,358
42
46
28
4
31
5
12
29
18
15
17
32
—
1,661
1,661
7
12
8
—
10
27
3
6
11
13
12
12
—
313
313
$345 - $514
$280 - $390
$387 - $495
$375 - $450
$363 - $464
$287 - $357
$245 - $280
$299 - $540
$270 - $375
$281 - $344
$315 - $436
$318 - $420
3
3
1
—
4
—
5
3
1
1
—
4
78
610
610
- 12 -
TRI Pointe Homes
County, Project, City
Southern California
Orange County:
Aria, Rancho Mission Viejo
Viridian
Sterling Row Townhomes, Irvine
Varenna at Orchard Hills, Irvine
Alston, Anaheim
StrataPointe, Buena Park
Lyric
Citron at Bedford
San Diego County:
Prism at Weston
Talus at Weston
Riverside County:
Terrassa Court, Corona
Terrassa Villas, Corona
Cypress Ridge
Los Angeles County:
VuePointe, El Monte
Bradford @ Rosedale, Azusa
Lucera at Aliento
Tierno at Aliento
Tierno II at Aliento
Paloma at West Creek
Mystral
Celestia
San Bernardino County:
St. James at Park Place, Ontario
St. James III at Park Place, Ontario
The Preserve
Tempo at The Resort
Closed Communities
Southern California Total
Northern California
Contra Costa County:
Wynstone at Barrington, Brentwood
Santa Clara County:
Madison Gate
Luchessa
The Grove
The Heights
Solano County:
Bloom at Green Valley, Fairfield
Harvest at Green Valley, Fairfield
Lantana, Fairfield
San Joaquin County:
Sundance, Mountain House
Sundance II, Mountain House
Alameda County:
Commercial, Alameda Landing
Blackstone at the Cannery, Hayward SFA
Year of
First
Delivery(1
)
Total
Number of
Lots(2)
Cumulative
Homes
Delivered
as of
December 31,
2018
Lots
Owned as of
December 31,
2018(3)
Backlog as of
December 31,
2018(4)(5)
Homes
Delivered
for the Twelve
Months Ended
December 31,
2018
151
72
96
135
75
149
70
35
142
63
94
52
245
102
52
67
63
63
155
78
72
125
82
246
80
—
146
17
95
73
60
125
—
—
34
32
93
46
—
87
51
62
49
10
50
—
—
119
37
—
—
—
5
55
1
10
15
24
70
35
108
31
1
6
245
15
1
5
14
53
105
78
72
6
45
246
80
—
1
12
1
7
15
12
16
11
5
6
1
2
—
9
1
1
—
5
11
7
11
—
4
—
—
—
51
17
73
34
41
71
—
—
34
32
26
32
—
73
36
39
22
10
50
—
—
10
37
—
—
81
Sales Price
Range(in thousa
nds)(6)
$646 - $716
$895 - $978
$622 - $824
$1,258 - $1,322
$820 - $860
$549 - $727
$790 - $915
$384 - $411
$573 - $606
$680 - $720
$446 - $499
$486 - $547
$422 - $542
$512 - $634
$846 - $906
$627 - $645
$640 - $697
$640 - $697
$453 - $511
$635 - $673
$598 - $623
$522 - $554
$522 - $554
$357 - $439
$573 - $607
2,564
1,186
1,326
138
769
92
65
49
64
25
91
56
133
113
138
2
105
77
24
—
—
—
31
28
—
108
59
—
104
- 13 -
15
41
49
64
25
60
28
133
5
79
2
1
5
2
—
—
—
1
2
11
—
3
—
—
41
24
—
—
—
31
28
—
3
56
—
30
$603 - $675
$847 - $1,134
$755 - $799
$850 - $920
$960 - $1,225
$530 - $570
$560 - $630
$455 - $490
$648 - $721
$648 - $721
$575
$666 - $776
2016
2018
2017
2016
2017
2017
2019
2019
2018
2018
2015
2015
2019
2017
2017
2017
2017
2018
2018
2019
2019
2015
2018
2019
2019
N/A
2017
2018
2019
2019
2019
2018
2018
2018
2015
2017
2018
2016
Slate at Jordan Ranch, Dublin
Onyx at Jordan Ranch, Dublin
Quartz at Jordan Ranch, Dublin
Apex, Fremont
Palm, Fremont
Mayhew Way, Pleasant Hill
Ellis at Central Station, Oakland
Sacramento County:
Natomas
Twelve Bridges
San Francisco County:
Lofton at NOPO, San Francisco
Closed Communities
Northern California Total
California Total
Colorado
Douglas County:
Terrain Ravenwood Village (3500)
Terrain Ravenwood Village (4000)
Trails at Crowfoot
Sterling Ranch
The Canyons
Jefferson County:
Candelas 6000 Series, Arvada
Candelas 3500 Series, Arvada
Candelas 5000 Series, Arvada
Candelas 4020 Series, Arvada
Crown Pointe, Westminster
Arapahoe County:
Whispering Pines, Aurora
Adams County:
Amber Creek, Thornton
Closed Communities
Colorado Total
TRI Pointe Total
2017
2017
2018
2018
2018
2019
2019
2019
2019
2020
N/A
2018
2018
2020
2020
2020
2015
2016
2017
2019
2019
2016
2017
N/A
56
105
45
77
31
44
128
94
102
54
—
1,669
4,233
157
100
100
80
89
76
97
62
98
64
115
121
—
1,159
5,392
51
54
30
39
—
—
—
—
—
—
—
605
1,791
34
33
—
—
—
75
81
44
—
—
64
68
—
5
51
15
38
31
44
128
94
102
54
—
1,064
2,390
123
67
100
80
89
1
16
18
98
64
51
53
—
399
2,190
760
3,150
—
3
4
2
3
—
—
—
—
—
—
36
174
31
15
—
—
—
—
15
10
23
7
18
25
—
144
318
35
45
30
39
$1,125 - $1,225
$899 - $951
$958 - $1,098
$784 - $1,096
— $2,120 - $2,225
$910 - $980
$720 - $805
$344 - $410
$432 - $528
$985 - $1,238
$366 - $425
$400 - $471
TBD
TBD
TBD
$516 - $671
$398 - $456
$499 - $584
$458 - $520
$430 - $490
$572 - $656
$386 - $477
—
—
—
—
—
88
450
1,219
34
33
—
—
—
22
45
35
—
—
37
39
6
251
1,470
- 14 -
Winchester Homes
County, Project, City
Maryland
Anne Arundel County:
Two Rivers Townhomes, Crofton
Two Rivers Cascades SFD, Crofton
Watson's Glen, Millersville
Frederick County:
Landsdale, Monrovia
Landsdale SFD
Landsdale Townhomes
Landsdale TND Neo SFD
Montgomery County:
Cabin Branch, Clarksburg
Cabin Branch SFD
Cabin Branch Avenue Townhomes
Cabin Branch Townhomes
Preserve at Stoney Spring
Poplar Run SFD, Silver Spring
Glenmont MetroCenter, Silver Spring
Chapman Row, Rockville
Randolph Farms, Rockville
Closed Communities
Maryland Total
Virginia
Fairfax County:
Stuart Mill & Timber Lake, Oakton
Stuart Mill, Oakton
Westgrove, Fairfax
West Oaks Corner, Fairfax
Prince William County:
Villages of Piedmont, Haymarket
Loudoun County:
Brambleton, Ashburn
West Park SFD
Birchwood AA
Vistas at Lansdowne, Lansdowne
Willowsford Grant II, Aldie
Willowsford Greens
Closed Communities
Virginia Total
Winchester Total
Year of
First
Delivery(1
)
Total
Number of
Lots(2)
Cumulative
Homes
Delivered
as of
December 31,
2018
Lots
Owned as of
December 31,
2018(3)
Backlog as of
December 31,
2018(4)(5)
Homes
Delivered
for the Twelve
Months Ended
December 31,
2018
Sales Price
Range(in thou
sands)(6)
2017
2018
2015
2015
2015
2015
2014
2017
2014
N/A
2010
2016
2019
2019
N/A
2014
N/A
2018
2019
2015
2018
2018
2015
2016
N/A
N/A
84
37
103
222
100
77
359
121
507
4
305
171
61
104
—
39
16
4
125
76
44
204
52
299
—
304
75
—
—
—
2,255
1,238
14
5
23
188
168
42
26
120
55
1
—
14
—
—
—
167
20
9
109
23
—
—
45
21
99
97
24
33
155
69
208
4
1
96
61
104
—
1,017
—
5
23
188
1
22
17
11
32
1
—
642
2,897
342
1,580
300
1,317
9
4
—
13
2
3
11
6
4
—
—
9
—
—
—
61
—
—
6
—
1
12
13
5
7
—
—
44
105
31
16
—
39
29
17
60
28
78
—
23
39
—
—
8
368
5
—
1
—
$450 - $560
$540 - $625
TBD
$495 - $597
$330 - $383
$440 - $473
$510 - $745
$414 - $485
$393 - $458
N/A
$635 - $770
$435 - $513
TBD
TBD
Closed
NA
$996 - $1,102
TBD
58
$373 - $460
$700 - $724
$574 - $629
$536 - $576
$950 - $1,226
N/A
20
9
38
13
—
—
144
512
Combined Company Total
32,736
9,627
23,057
1,335
5,071
______________________________________________
(1) Year of first delivery for future periods is based upon management's estimates and is subject to change.
(2) The number of homes to be built at completion is subject to change, and there can be no assurance that we will build these homes.
(3) Owned lots as of December 31, 2018 include owned lots in backlog as of December 31, 2018.
(4) Backlog consists of homes under sales contracts that had not yet been delivered, and there can be no assurance that delivery of sold
homes will occur. See “Backlog” below.
(5) Of the total homes in backlog as of December 31, 2018, 936 homes are under construction, 143 homes have completed construction,
and 256 homes have not started construction.
- 15 -
(6) Sales price range reflects base price only and excludes any lot premium, homebuyer incentives and homebuyer-selected options,
which may vary from project to project. Sales prices for homes required to be sold pursuant to affordable housing requirements are
excluded from sales price range. Sales prices reflect current pricing and might not be indicative of past or future pricing.
Acquisition Process
We believe that our current inventory of lots owned or controlled will be adequate to supply our homebuilding operations
for the foreseeable future. Our acquisition process generally includes the following steps to reduce development and market
cycle risk:
•
•
•
•
•
•
•
review of the status of entitlements and other governmental processing, including title reviews;
limitation on the size of an acquisition to minimize investment levels in any one project;
completion of due diligence on the land parcel prior to committing to the acquisition;
preparation of detailed budgets for all cost categories;
completion of environmental reviews and third-party market studies;
utilization of options, joint ventures and other land acquisition arrangements, if necessary; and
employment of centralized control of approval over all acquisitions through a land committee process.
Before purchasing a land parcel, we also engage outside architects and consultants to help review our proposed
acquisition and design our homes and communities.
We acquire land parcels pursuant to purchase agreements that are often structured as option contracts. These option
contracts require us to pay non-refundable deposits, which can vary by transaction, and entitle (but do not obligate) us to
acquire the land, typically at fixed prices. The term within which we can exercise our option varies by transaction and our
acquisition is often contingent upon the completion of entitlement or other work with regard to the land (such as "backbone"
improvements, which include the installation of main roads or sewer mains). Depending upon the transaction, we may be
required to purchase all of the land involved at one time or we may have a right to acquire identified groups of lots over a
specified timetable. In some transactions, a portion of the consideration that we pay for the land may be in the form of a share
of the profits of a project after we receive an agreed upon level of profits from the project. In limited instances, such as when
we acquire land from a master developer that is part of a larger project, the seller may have repurchase rights entitling it to
repurchase the land from us under circumstances when we do not develop the land by an outside deadline (unless the delay is
caused by certain circumstances outside our control), or when we seek to sell the land directly to a third party or indirectly
through a change in control of our company. Repurchase rights typically allow the seller to repurchase the land at the price that
we paid the seller to acquire the land plus the cost of improvements that we have made to the land and less some specified
discount.
Our Community Development, Construction and Sales and Marketing Process
Community Development
In California, we typically develop community phases based upon projected sales, and we construct homes in each phase
whether or not they have been pre-sold. We have the ability to control the timing of construction of subsequent phases in the
same community based on sales activity in the prior phase, market conditions and other factors. We also will attempt to delay
much of the customization of a home until a qualified homebuyer has been approved, so as to enable the homebuyer to tailor
the home to that homebuyer's specifications; however, we will complete the build out of any unsold homes in a particular phase
when deemed appropriate for marketing purposes of such home. In our other regions, we typically develop communities on a
lot by lot basis driven by sales demand.
The design of our homes is limited by factors such as zoning requirements, building codes and energy efficiency
laws. As a result, we contract with a number of architects and other consultants in connection with the design process.
Construction
Substantially all of our construction work is done by subcontractors with us acting as the general contractor. We also
enter into contracts as needed with design professionals and other service providers who are familiar with local market
conditions and requirements. We do not have long-term contractual commitments with our subcontractors, suppliers or
laborers. We maintain strong and long-standing relationships with many of our subcontractors. We believe that our
relationships have been enhanced through both maintaining our schedules and making timely payment to our
subcontractors. By dealing fairly with our key subcontractors, we are able to keep them attentive to our projects.
- 16 -
Sales and Marketing
In connection with the sale and marketing of our homes, we make extensive use of online and offline advertising and
other promotional activities, including digital paid search and display advertising, the website of each of our six regional
brands, print media advertisements, brochures, direct mail and the placement of signboards in the immediate areas of our
developments. We sell our homes through our own sales representatives and through independent real estate brokers. Our in-
house sales force typically works from sales offices located in model homes close to or in each community. Sales
representatives assist potential homebuyers by providing them with basic floor plans, price information, development and
construction timetables, tours of model homes, and the selection of options. Sales personnel are licensed, if applicable, by the
real estate bodies in their respective markets, are trained by us and generally have had prior experience selling new homes in
the local market. Our personnel, along with subcontracted marketing and design consultants, carefully design exteriors and
interiors of each home to coincide with the lifestyles of targeted homebuyers.
As of December 31, 2018, we owned 418 model homes that were either completed or under construction. Generally, we
build model homes at each project and have them professionally decorated to display design features. We believe that model
homes play a significant role in helping homebuyers understand the efficiencies and value provided by each floor plan
type. Interior decorations vary among our models and are selected based upon the lifestyles of our homebuyers. Structural
changes in design from the model homes are not generally permitted, but homebuyers may select various other optional
construction and design amenities. In addition to model homes, homebuyers can gain an understanding of the various design
features and options available to them using design centers. At each design center, homebuyers can meet with a designer and
are shown the standard and upgraded selections available to them.
We typically sell homes using sales contracts that include cash deposits by the purchasers. However, purchasers can
generally cancel sales contracts if they are unable to sell their existing homes, if they fail to qualify for financing, or under
certain other circumstances. Although cancellations can delay the sale of our homes, they have historically not had a material
impact on our operating results. The cancellation rate of homebuyers who contracted to buy a home but did not close escrow
(as a percentage of overall orders) was 18% and 15% for the years ended December 31, 2018 and 2017,
respectively. Cancellation rates are subject to a variety of factors beyond our control such as adverse economic conditions and
increases in mortgage interest rates. Our inventory of completed and unsold production homes was 417 and 269 homes as of
December 31, 2018 and 2017, respectively.
Homebuyer Financing, Title and Homeowners Insurance Services
We seek to assist our homebuyers in obtaining financing by arranging with mortgage lenders to offer qualified
homebuyers a variety of financing options. Substantially all homebuyers utilize long-term mortgage financing to purchase a
home and mortgage lenders will usually make loans only to qualified borrowers. Our financial services operation (“TRI Pointe
Solutions”) is comprised of mortgage financing operations (“TRI Pointe Connect”), which was formed as a joint venture with
an established mortgage lender, our title services operations (“TRI Pointe Assurance”), and our property and casualty insurance
agency operations (“TRI Pointe Advantage”), which launched in early 2018. While our homebuyers may obtain financing from
any mortgage provider of their choice, TRI Pointe Connect can act as a preferred mortgage broker to our homebuyers in all of
the markets in which we operate, providing mortgage financing options that help 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 Texas,
Maryland and Virginia. TRI Pointe Assurance is a wholly owned subsidiary of TRI Pointe and acts as a title agency for First
American Title Insurance Company. TRI Pointe Advantage is a wholly owned subsidiary of TRI Pointe and provides property
and casualty agency services that help facilitate the closing process in all of the markets in which we operate.
Quality Control and Customer Service
We pay particular attention to the product design process and carefully consider quality and choice of materials in order
to attempt to eliminate building deficiencies. We monitor the quality and workmanship of the subcontractors that we employ
and we make regular inspections and evaluations of our subcontractors to seek to ensure that our standards are met.
We maintain quality control and customer service staff whose role includes providing a positive experience for each
homebuyer throughout the pre-sale, sale, building, delivery and post-delivery periods. These employees are also responsible
for providing after sales customer service. Our quality and service initiatives include taking homebuyers on a comprehensive
tour of their home prior to delivery and using homebuyer survey results to improve our standards of quality and homebuyer
satisfaction.
- 17 -
Warranty Program
In the normal course of business, we incur warranty-related costs associated with homes that have been delivered to
homebuyers. Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related
home sales revenues are recognized while indirect warranty overhead salaries and related costs are charged to cost of sales in
the period incurred. Estimation of accruals include consideration of our claims history, including current claims and estimates
of claims incurred but not yet reported. In addition, management estimates warranty reserves and allowances necessary to
cover any current or future construction-related claims based on actuarial analysis. Under this analysis, reserve amounts are
estimated using our historical expense and claim data, as well as industry data. Factors that affect the warranty accruals include
the number of homes delivered, historical and anticipated rates of warranty claims and cost per claim. Although we consider
the warranty accruals reflected in our consolidated balance sheet to be adequate, actual future costs could differ significantly
from our currently estimated amounts. Our warranty accrual is included in accrued expenses and other liabilities in our
consolidated balance sheets included elsewhere in this annual report on Form 10-K. 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. 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.
Seasonality
We have experienced seasonal variations in our quarterly operating results and capital requirements. We typically take
orders for more homes in the first half of the fiscal year than in the second half, which creates additional working capital
requirements in the second and third quarters to build our inventories to satisfy the deliveries in the second half of the year. We
expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding
industry. In addition to the overall volume of orders and deliveries, our operating results in a given quarter are significantly
affected by the number and characteristics of our active selling communities; timing of new community openings; the timing of
land and lot sales; and the mix of product types, geographic locations and average selling prices of the homes delivered during
the quarter. Therefore, our operating results in any given quarter will fluctuate compared to prior periods based on these
factors.
Backlog
Backlog units reflects the number of homes, net of actual cancellations experienced during the period, for which we have
entered into a sales contract with a homebuyer but for which we have not yet delivered the home. Homes in backlog are
generally delivered within three to nine months from the time the sales contract is entered into, although we may experience
cancellations of sales contracts prior to delivery. The dollar value of backlog was approximately $897.3 million and $1.0
billion as of December 31, 2018 and 2017, respectively. We expect all of our backlog at December 31, 2018 to be converted to
deliveries and revenues during 2019, net of cancellations. For information concerning backlog units, the dollar value and
average sales price by segment, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included in this annual report on Form 10-K.
Raw Materials
Typically, all of the raw materials and most of the components used in our business are readily available in the United
States. Most are standard items carried by major suppliers. However, a rapid increase in the number of homes started,
governmental policies, or other market conditions could cause delays in the delivery of, shortages in, or higher prices for
necessary materials. Delivery delays or the inability to obtain necessary materials could result in delays in the delivery of
homes under construction. We have established national purchase programs for certain materials and we continue to monitor
the supply markets to achieve the best prices available.
- 18 -
Our Financing Strategy
We intend to employ debt and/or equity as part of our ongoing financing strategy, coupled with redeployment of cash
flows from continuing operations, to provide us with the financial flexibility to access capital on the best terms available. In
that regard, we expect to employ prudent levels of leverage to finance the acquisition and development of our lots and
construction of our homes. As of December 31, 2018, we had no outstanding debt related to our unsecured revolving credit
facility (the “Credit Facility”) and $568.2 million available under the Credit Facility after considering the borrowing base
provisions and outstanding letters of credit, as well as $277.7 million in cash and cash equivalents. As of December 31, 2018
we had $1.4 billion of outstanding senior notes. Our board of directors considers a number of factors when evaluating our level
of indebtedness and when making decisions regarding the incurrence of new indebtedness, including the purchase price of
assets to be acquired with debt financing, the estimated market value of our assets and the ability of particular assets, and our
company as a whole, to generate cash flow to cover the expected debt service.
We intend to finance future acquisitions and developments with the most advantageous source of capital available to us
at the time of the transaction, which may include a combination of common and preferred equity, secured and unsecured
corporate level debt, property-level debt and mortgage financing and other public, private or bank debt.
Segments
The Company's operations are organized in two principal businesses: homebuilding and financial services.
Our homebuilding operation consists of six reportable segments: Maracay, 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, Colorado and
the Carolinas; 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 our TRI Pointe
Connect mortgage financing operations, our TRI Pointe Assurance title services operations, and with its launch in 2018, our
TRI Pointe Advantage property and casualty insurance agency operations.
For financial information about our segments, see Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 2, Segment Information, of the notes to our consolidated financial statements
included elsewhere in this annual report on Form 10-K.
Government Regulation and Environmental Matters
We are subject to numerous local, state, federal and other statutes, ordinances, rules and regulations concerning zoning,
development, building design, construction and similar matters which impose restrictive zoning and density requirements, the
result of which is to limit the number of homes that can be built within the boundaries of a particular area. Projects that are not
entitled may be subjected to periodic delays, changes in use, less intensive development or elimination of development in
certain specific areas due to government regulations. We may also be subject to periodic delays or may be precluded entirely
from developing in certain communities due to building moratoriums or "slow-growth" or "no-growth" initiatives that could be
implemented in the future. Local governments also have broad discretion regarding the imposition of development fees and
exactions for projects in their jurisdiction. Projects for which we have received land use and development entitlements or
approvals may still require a variety of other governmental approvals and permits during the development process and can also
be impacted adversely by unforeseen health, safety and welfare issues, which can further delay these projects or prevent their
development. Also, some states are attempting to make homebuilders responsible for violations of wage and other labor laws
by their subcontractors. For example, a California law makes direct contractors liable for wages, fringe benefits, or other
benefit payments or contributions owed by a subcontractor that does not make these payments or contributions to its employees.
- 19 -
We are also subject to a variety of local, state, federal and other statutes, ordinances, rules and regulations concerning the
environment. These environmental laws include such areas as storm water and surface water management, soil, groundwater
and wetlands protection, subsurface conditions and air quality protection and enhancement. The particular environmental laws
that apply to any given homebuilding site vary according to multiple factors, including the site's location, its environmental
conditions and the present and former uses of the site, as well as adjoining properties. Environmental laws and conditions may
result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict
homebuilding activity in environmentally sensitive regions or areas. In addition, in those cases where an endangered or
threatened species is involved, environmental rules and regulations can result in the restriction or elimination of development in
identified environmentally sensitive areas. From time to time, the United States Environmental Protection Agency and similar
federal or state agencies review homebuilders' compliance with environmental laws and may levy fines and penalties for failure
to strictly comply with applicable environmental laws or impose additional requirements for future compliance as a result of
past failures. Any such actions taken with respect to us may increase our costs. Further, we expect that as concerns about
climate change and other environmental issues continue to grow, homebuilders will be required to comply with increasingly
stringent laws and regulations. Environmental laws and regulations can also have an adverse impact on the availability and
price of certain raw materials such as lumber. California is especially susceptible to restrictive government regulations and
environmental laws. In addition, home deliveries in California may be delayed or prevented due to governmental responses to
drought conditions, even when we have obtained water rights for those projects.
Under various environmental laws, current or former owners of real estate, as well as certain other categories of parties,
may be required to investigate and clean up hazardous or toxic substances or petroleum product releases, and may be held liable
to a governmental entity or to third parties for related damages, including for bodily injury, and for investigation and clean-up
costs incurred by such parties in connection with the contamination. A mitigation system may be installed during the
construction of a home if a cleanup does not remove all contaminants of concern or to address a naturally occurring condition
such as methane. Some homebuyers may not want to purchase a home with a mitigation system.
Our general contractor, real estate broker, mortgage joint venture, title agency, and insurance agency operations are
subject to licensing and regulation in the jurisdictions in which they operate. Consequently, they are subject to net worth,
bonding, disclosure, record-keeping and other requirements. Failure to comply with applicable requirements could result in
loss of license, financial penalties, or other sanctions.
Refer to Part I, Item 1A. "Risk Factors" of this annual report on Form 10-K for risks related to government regulation
and environmental matters.
Competition
Competition in the homebuilding industry is intense, and there are relatively low barriers to entry into our
business. Homebuilders compete for, among other things, homebuyers, desirable land parcels, financing, raw materials and
skilled labor. We compete for homebuyers primarily on the basis of a number of interrelated factors including home design and
location, price, homebuyer satisfaction, construction quality, reputation and the availability of mortgage financing. Increased
competition could hurt our business, as it could prevent us from acquiring attractive land parcels on which to build homes or
make such acquisitions more expensive, hinder our market share expansion, and lead to pricing pressures on our homes that
may adversely impact our margins and revenues. Our competitors may independently develop land and construct housing units
that are superior or substantially similar to our products. Furthermore, several of our primary competitors are significantly
larger, have longer operating histories and may have greater resources or lower cost of capital than ours; accordingly, they may
be able to compete more effectively in one or more of the markets in which we operate. Many of these competitors also have
longstanding relationships with subcontractors and suppliers in the markets in which we operate. We also compete for sales
with individual resales of existing homes and with available rental housing.
Employees
As of December 31, 2018, we had 1,435 employees, 577 of whom were executive, management and administrative
personnel, 334 of whom were sales and marketing personnel and 524 of whom were involved in field construction. Although
none of our employees are covered by collective bargaining agreements, certain of the subcontractors engaged by us are
represented by labor unions or are subject to collective bargaining arrangements. We believe that our relations with our
employees and subcontractors are good.
- 20 -
Access to Information
Our internet website is www.tripointegroup.com. We make available free of charge through our website our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after being filed with, or
furnished to, the Securities and Exchange Commission (“SEC”).
We provide information about our business and financial performance, including webcasts of our earnings calls, in the
“investors” portion of our internet website. In addition, corporate governance information, including our codes of ethics,
corporate governance guidelines, and board committee charters, is also available there.
The information contained in, or that can be accessed through, our website is not incorporated by reference and is not a
part of this annual report on Form 10-K. In addition, the SEC website at www.sec.gov contains reports, proxy and information
statements, and other information we file with, or furnish to, the SEC.
Item 1A.
Risk Factors
Investors should carefully consider the following risk factors, which address the material risks concerning our business,
together with the other information contained in this annual report on Form 10-K. If any of the risks discussed in this annual
report on Form 10-K occur, our business, liquidity, financial condition and results of operations (individually and collectively
referred to in these risk factors as “Financial Performance”) could be materially and adversely affected, in which case the
trading price of our common stock could decline significantly and stockholders could lose all or a part of their
investment. Some statements in this annual report on Form 10-K, including statements in the following risk factors, constitute
forward-looking statements. Please refer to the initial section of this annual report on Form 10-K entitled “Cautionary Note
Concerning Forward-Looking Statements.”
Risks Related to Our Business
Our long-term growth depends upon our ability to identify and successfully acquire desirable land parcels at
reasonable prices.
Our future growth depends upon our ability to identify and successfully acquire attractive land parcels for development
of our projects at reasonable prices and with terms that meet our underwriting criteria. Our ability to acquire land parcels for
new projects may be adversely affected by changes in the general availability of land parcels, the willingness of land sellers to
sell land parcels at reasonable prices, competition for available land parcels, availability of financing to acquire land parcels,
zoning and other market conditions. If the supply of land parcels appropriate for development of projects is limited because of
these factors, or for any other reason, our ability to grow could be significantly limited, and the number of homes that we build
and sell could decline. Additionally, our ability to begin new projects could be impacted if we elect not to purchase land parcels
under option contracts. To the extent that we are unable to purchase land parcels in a timely manner or enter into new contracts
for the purchase of land parcels at reasonable prices, our home sales revenue and Financial Performance could be materially
and adversely affected.
Our quarterly results of operations may fluctuate because of the seasonal nature of our business and other factors.
We have experienced seasonal fluctuations in quarterly results of operations and capital requirements that can have a
material and adverse impact on our Financial Performance. In addition, we have experienced fluctuations in quarterly results of
operations due to the number and characteristics of our active selling communities; the timing of new community openings; the
timing of land and lot sales; and the mix of product types, geographic locations and average selling prices of the homes
delivered during the quarter. We typically experience the highest new home order activity during the first and second quarters of
our fiscal year. Since it typically takes four to six months to construct a new home, the number of homes delivered and
associated home sales revenue typically increases in the third and fourth quarters of our fiscal year as new home orders sold
earlier in the year convert to home deliveries. We believe that this type of seasonality reflects the historical tendency of
homebuyers to purchase new homes in the spring and summer with deliveries scheduled in the fall or winter, as well as the
scheduling of construction to accommodate seasonal weather conditions in certain markets. Although we expect this seasonal
pattern to continue over the long-term, it may be affected by market cyclicality and other market factors, including seasonal
natural disasters such as hurricanes, tornadoes, floods and fires, and there can be no assurance that historical seasonal patterns
will continue to exist in future reporting periods. In addition, as a result of seasonal variability, our historical performance may
not be a meaningful indicator of future results.
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Seasonality also requires us to finance construction activities in advance of the receipt of sales proceeds. In many cases,
we may not be able to recapture increased costs by raising prices because prices are established upon signing the purchase
contract. Accordingly, there is a risk that we will invest significant amounts of capital in the acquisition and development of
land and construction of homes that we do not sell at anticipated pricing levels or within anticipated time frames. If, due to
market conditions, construction delays or other causes, we do not complete sales of our homes at anticipated pricing levels or
within anticipated time frames, our Financial Performance could be materially and adversely affected.
Our business is cyclical and subject to risks associated with the real estate industry, and adverse changes in general
economic or business conditions could reduce the demand for homes and materially and adversely affect us.
The residential homebuilding and land development industry is cyclical and is substantially affected by adverse changes
in general economic or business conditions that are outside of our control, including changes in:
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short- and long-term interest rates;
the availability and cost of financing for real estate industry participants, including financing for acquisitions,
construction and permanent mortgages;
unanticipated increases in expenses, including, without limitation, insurance costs, labor and materials costs,
development costs, real estate assessments and other taxes and costs of compliance with laws, regulations and
governmental policies;
enforcement of laws, regulations and governmental policies, including, without limitation, health, safety,
environmental, labor, employment, zoning and tax laws, governmental fiscal policies and the Americans with
Disabilities Act of 1990;
consumer confidence generally and the confidence of potential homebuyers and others in the real estate industry
in particular;
financial conditions of buyers and sellers of properties, particularly residential homes and land suitable for
development of residential homes;
the ability of existing homeowners to sell their existing homes at prices that are acceptable to them;
the U.S. and global financial systems and credit markets, including stock market and credit market volatility;
private and federal mortgage financing programs and federal and state regulation of lending practices;
the availability and cost of construction, labor and materials;
federal and state income tax provisions, including provisions for the deduction of mortgage interest payments;
the deduction of state and local tax, including real estate tax; and capital gain tax rates;
housing demand from population growth, household formation and demographic changes (including
immigration levels and trends in urban and suburban migration);
the supply of available new or existing homes and other housing alternatives, such as condominiums,
apartments and other residential rental property;
competition from other real estate investors with significant capital, including other real estate operating
companies and developers and institutional investment funds;
employment levels and job and personal income growth and household debt-to-income levels;
the rate of inflation;
real estate taxes; and
the supply of, and demand for, developable land in our current and expected markets.
Adverse changes in these or other general economic or business conditions may affect our business nationally or in
particular regions or localities. During the most recent economic downturn, several of the markets we serve, and the U.S.
housing market as a whole, experienced a prolonged decrease in demand for new homes, as well as an oversupply of new and
existing homes available for sale. Demand for new homes is affected by weakness in the resale market because many new
homebuyers need to sell their existing homes in order to buy a home from us. In addition, demand may be adversely affected
by alternatives to new homes, such as rental properties and existing homes. In the event of another economic downturn or if
general economic conditions should worsen, our home sales could decline and we could be required to write down or dispose of
assets or restructure our operations or debt, any of which could have a material adverse effect on our Financial Performance.
Adverse changes in economic or business conditions can also cause increased home order cancellation rates, diminished
demand and prices for our homes, and diminished value of our real estate investments. These changes can also cause us to take
longer to build homes and make it more costly for us to do so. We may not be able to recover any of the increased costs by
raising prices because of weak market conditions and increasing pricing pressure. Additionally, the price of each home we sell
is usually set several months before the home is delivered, as many homebuyers sign their home purchase contracts before or
early in the construction process. The potential difficulties described above could impact our homebuyers’ ability to obtain
suitable financing and cause some homebuyers to cancel or refuse to honor their home purchase contracts altogether.
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Because most of our homebuyers finance the purchase of their homes, the terms and availability of mortgage
financing can affect the demand for and the ability to complete the purchase of a home, which could materially and
adversely affect us.
Our business depends on the ability of our homebuyers to obtain financing for the purchase of their homes. Many of our
homebuyers must sell their existing homes in order to buy a home from us. During the last economic downturn, the U.S.
residential mortgage market as a whole experienced significant instability due to, among other things, defaults on subprime and
other loans, resulting in the declining market value of those loans. In light of these developments, lenders, investors, regulators
and other third parties questioned the adequacy of lending standards and other credit requirements. This led to tightened credit
requirements and an increase in indemnity claims for mortgages. Deterioration in credit quality among subprime and other
nonconforming loans has caused most lenders to eliminate subprime mortgages and most other loan products that do not
conform to Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie
Mac”), Federal Housing Administration (the “FHA”) or Veterans Administration (the “VA”) standards. Fewer loan products
and tighter loan qualifications, in turn, make it more difficult for a borrower to finance the purchase of a new home or the
purchase of an existing home from a potential homebuyer who wishes to purchase one of our homes. If our potential
homebuyers or the buyers of our homebuyers’ existing homes cannot obtain suitable financing, our Financial Performance
could be materially and adversely affected.
Our homebuyers may obtain mortgage financing for their home purchases from any lender of their choice. However, we
can provide no assurance as to third-party lenders’, including our joint venture partner in TRI Pointe Connect, ability or
willingness to complete, in a timely fashion or at all, the mortgage loan originations they start for our homebuyers. Such
lenders’ inability or unwillingness may result in mortgage loan funding issues that delay deliveries of our homes or cause
cancellations, which could in the aggregate have a material and adverse effect on our Financial Performance. In addition, if
such third-party lenders, mishandle our homebuyers’ personal financial information, including due to a data security breach of
their systems, the negative impacts on our homebuyers, or negative publicity arising from any such incidents, could create,
among other things, associated exposure to us with respect to claims for damages, regulatory penalties or reputational harm, and
such exposure could be material and adverse to our Financial Performance.
Interest rate increases or changes in federal lending programs or other regulations could lower demand for our
homes, which could materially and adversely affect us.
Most of the purchasers of our homes finance their acquisitions with mortgage financing. We depend on third-party
lenders, including our joint venture partner in TRI Pointe Connect, to provide mortgage loans to our homebuyers who need
such financing to purchase our homes, and our dependence on such lenders is greater than for other homebuilders that operate a
captive mortgage lender. Homebuyers’ ability to obtain financing largely depends on prevailing mortgage loan interest rates,
the credit standards that mortgage lenders use and the availability of mortgage loan programs. In December 2018, the U.S.
Federal Open Market Committee (“FOMC”) raised the target range for the federal funds rate to 2¼ to 2½ percent. We are
unable to predict if, or when, the FOMC will announce further increases or the impact of any such increases on home mortgage
interest rates. Rising interest rates, decreased availability of mortgage financing or of certain mortgage programs, higher down
payment requirements or increased monthly mortgage costs may lead to reduced demand for our homes. Increased interest
rates can also hinder our ability to realize our backlog because our home purchase contracts provide homebuyers with a
financing contingency. Financing contingencies allow homebuyers to cancel their home purchase contracts in the event that
they cannot arrange for adequate financing. As a result, rising interest rates can decrease our home sales and mortgage
originations. Any of these factors could have a material adverse effect on our Financial Performance.
In addition, the uncertainties in the mortgage markets and increased government regulation could adversely affect the
ability of potential homebuyers to obtain financing for home purchases, thus preventing them from purchasing our homes.
Among other things, changes made by Fannie Mae, Freddie Mac and FHA/VA to sponsored mortgage programs, as well as
changes made by private mortgage insurance companies, have reduced the ability of many potential homebuyers to qualify for
mortgages. Principal among these are higher income requirements, larger required down payments, increased reserves, higher
mortgage insurance premiums and higher required credit scores. In addition, there continues to be uncertainty regarding the
future of Fannie Mae and Freddie Mac, including proposals that they reduce or terminate their role as the principal sources of
liquidity in the secondary market for mortgage loans. It is not clear how, if Fannie Mae and Freddie Mac were to curtail their
secondary market mortgage loan purchases, the liquidity they provide would be replaced. Because the availability of Fannie
Mae, Freddie Mac, FHA- and VA-backed mortgage financing is an important factor in marketing and selling many of our
homes, any limitations, restrictions or changes in the availability of such government-backed financing could reduce our home
sales, which could have a material adverse effect on our Financial Performance. Further, there is a substantial possibility that
substituting an alternate source of liquidity would increase mortgage interest rates, which would increase the buyers' effective
costs of the homes we sell, and therefore could reduce demand for our homes and have a material adverse effect on our
Financial Performance.
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Recent tax law changes that increase the after-tax costs of owning a home could prevent potential customers from
buying our homes and adversely affect our Financial Performance.
Significant expenses of owning a home, including mortgage interest expenses and real estate taxes, were generally
deductible expenses for an individual’s federal, and in some cases state, income taxes, subject to limitations. Changes in federal
or state income tax laws that eliminate or substantially limit these income tax deductions, could increase the after-tax cost of
owning a new home for many of our potential customers. The “Tax Cuts and Jobs Act”, which was enacted in December 2017,
imposes significant limitations with respect to these income tax deductions. For example, through the end of 2025, the annual
deduction for real estate property taxes and state and local income or sales taxes has been limited to a combined amount of
$10,000 ($5,000 in the case of a separate return filed by a married individual). In addition, through the end of 2025, the
deduction for mortgage interest will generally only be available with respect to acquisition indebtedness that does not exceed
$750,000 ($375,000 in the case of a separate return filed by a married individual). These changes could adversely impact
demand for and sales prices of homes, including ours, which could adversely affect our Financial Performance.
We face numerous risks associated with controlling, purchasing, holding and developing land.
We acquire land for expansion into new markets and for replacement of land inventory and expansion within our current
markets. Risks inherent in controlling, purchasing, holding and developing land parcels for new home construction are
substantial and increase when demand for new homes decreases. Moreover, the market value of our land and home inventories
depends on market conditions and may decline after purchase, and the measures we employ to manage inventory risk may not
be adequate to insulate our operations from a severe drop in inventory values. In addition, inventory carrying costs can be
significant and can result in reduced margins or losses in a poorly performing community or market. We may have bought and
developed, or acquired options on, land at a cost that we will not be able to recover fully or on which we cannot build and sell
homes profitably. When market conditions are such that land values are not appreciating, existing option agreements may
become less desirable, at which time we may elect to forfeit deposits and pre-acquisition costs and terminate such agreements.
The valuation of real property is inherently subjective and based on the individual characteristics of each property.
Factors such as changes in regulatory requirements and applicable laws (including in relation to land development and building
regulations, taxation and planning), political conditions, environmental conditions and requirements, the condition of financial
markets, both local and national economic conditions, the financial condition of homebuyers, potentially adverse tax
consequences, and interest and inflation rate fluctuations subject valuations of real property to uncertainty. Moreover, all
valuations of real property are made on the basis of assumptions that may not prove to accurately reflect economic or
demographic conditions. If housing demand decreases below what we anticipated when we acquired our inventory, our
profitability may be materially and adversely affected and we may not be able to recover our costs when we build and sell
houses, land and lots.
The U.S. housing markets experience dynamic demand and supply patterns from time to time due to volatile economic
conditions, including increased amounts of home and land inventory that entered certain housing markets from foreclosure sales
or short sales. In certain periods of market weakness, we have sold homes and land for lower margins or at a loss and have
recognized significant inventory impairment charges, and such conditions may recur. Write-downs and impairments have had
an adverse effect on our Financial Performance. We review the value of our land holdings on a periodic basis. Further material
write-downs and impairments in the value of inventory may be required, and we may sell land or homes at a loss, which could
materially and adversely affect our Financial Performance.
Adverse weather and natural disasters may increase costs, cause project delays and reduce consumer demand for
housing.
As a homebuilder and land developer, we are subject to the risks associated with numerous weather-related events and
natural disasters that are beyond our control. These weather-related events and natural disasters include, but are not limited to,
droughts, floods, wildfires, landslides, soil subsidence, hurricanes, tornadoes and earthquakes. The occurrence of any of these
events could damage our land and projects, cause delays in, or prevent, completion of our projects, reduce consumer demand
for housing, and cause shortages and price increases in labor or raw materials, any of which could materially and adversely
affect our Financial Performance. We have substantial operations in Southern and Northern California that have historically
experienced significant earthquake activity and seasonal wildfires. Our markets in Colorado have also experienced seasonal
wildfires, floods and soil subsidence. In addition, our Washington market has historically experienced significant earthquake,
volcanic and seismic activity and our Texas market occasionally experiences extreme weather conditions such as tornadoes,
hurricanes and floods.
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In addition to directly damaging our land or projects, earthquakes, hurricanes, tornadoes, volcanoes, floods, wildfires or
other natural events could damage roads and highways providing access to those assets or affect the desirability of our land or
projects, thereby materially and adversely affecting our ability to market homes or sell land in those areas and possibly
increasing the cost to complete construction of our homes.
There are some risks of loss for which we may be unable to purchase insurance coverage. For example, losses associated
with landslides, earthquakes and other geologic events may not be insurable and other losses, such as those arising from
terrorism, may not be economically insurable. A sizeable uninsured loss could materially and adversely affect our Financial
Performance.
Drought conditions in California and other areas in which we operate may negatively impact the economy, increase
the risk of wildfires, cause us to incur additional costs, and delay or prevent new home deliveries.
Certain of the areas in which we operate, particularly in California, experience drought conditions from time to time.
Drought conditions could negatively impact the economy and environment as well as increase greatly the risk of wildfires.
In 2014, the Governor of California proclaimed a Drought State of Emergency warning that drought conditions may
place drinking water supplies at risk in many California communities. In response, the State Water Resources Control Board
(“Water Board”) adopted emergency regulations imposing mandatory water restrictions across the state. In 2017, the Governor
lifted the drought proclamation for most of California and the Water Board rescinded its emergency restrictions. However, the
Water Board maintained the urban water use reporting requirements and the prohibitions on wasteful water practices, and
announced a plan to make water conservation a long-term way of life in California. Additionally, some jurisdictions are
adopting increasingly strict water conservation measures, such as building standards for water efficient fixtures and
requirements for drought-tolerant landscaping and the use of recycled water.
These and other measures that are instituted to respond to drought conditions in California or other areas in which we
operate could cause us to incur additional costs. In addition, new home deliveries in some areas may be delayed or prevented
due to the unavailability of water, even when we have obtained water supply entitlements for those projects.
We may be unable to find and retain suitable contractors and subcontractors at reasonable rates.
Substantially all of our construction work is performed by subcontractors with us acting as the general contractor.
Accordingly, the timing and quality of our construction depend on the availability, cost and skill of contractors and
subcontractors and their employees.
The residential construction industry experiences serious shortages of skilled labor from time to time. The difficult
operating environment during the recent downturn in the United States has resulted in the failure of the businesses of some
contractors and subcontractors and future downturns could result in further failures. In addition, reduced levels of homebuilding
in the United States have caused some skilled tradesmen to leave the real estate industry to take jobs in other industries. These
shortages can be more severe during periods of strong demand for housing or during periods following natural disasters that
have a significant impact on existing residential and commercial structures. While we anticipate being able to obtain sufficient
reliable contractors and subcontractors during times of material shortages and believe that our relationships with contractors
and subcontractors are good, we do not have long-term contractual commitments with any contractors or subcontractors, and
there can be no assurance that skilled contractors, subcontractors or tradesmen will continue to be available in the areas in
which we conduct our operations. If skilled contractors and subcontractors are not available on a timely basis for a reasonable
cost, or if contractors and subcontractors are not able to recruit sufficient numbers of skilled employees, our development and
construction activities may suffer from delays and quality issues, which could lead to reduced levels of homebuyer satisfaction
and materially and adversely affect our Financial Performance.
Moreover, some of the subcontractors engaged by us are represented by labor unions or are subject to collective
bargaining arrangements that require the payment of prevailing wages that are typically higher than normally expected on a
residential construction site. A strike or other work stoppage involving any of our subcontractors could also make it difficult for
us to retain subcontractors for their construction work. In addition, union activity could result in higher costs for us to retain our
subcontractors. Access to qualified labor at reasonable rates may also be affected by other circumstances beyond our control,
including: (i) shortages of qualified tradespeople, such as carpenters, roofers, electricians and plumbers; (ii) high inflation;
(iii) changes in laws relating to employment wages and union organizing activity; (iv) changes in trends in labor force
migration; and (v) increases in contractor, subcontractor and professional services costs. The inability to contract with skilled
contractors and subcontractors at reasonable rates on a timely basis could materially and adversely affect our Financial
Performance.
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In addition, the enactment of federal, state or local statutes, ordinances, rules or regulations requiring the payment of
prevailing wages on private residential developments would materially increase our costs of development and construction. For
example, California, where we conduct a significant portion of our business, generally requires that workers employed on
public works projects in California be paid the applicable prevailing wage, as determined by the Department of Industrial
Relations. Private residential projects built on private property are exempt unless the project is built pursuant to an agreement
with a state agency, redevelopment agency, or local public housing authority. In 2017, the California legislature made this
exemption inapplicable to a project built pursuant to an agreement with a successor agency of a redevelopment agency. We
expect that the imposition of a prevailing wage requirement to additional types of projects would materially increase our costs
of development and construction for that project. Further extensions of prevailing wage requirements to private projects could
materially and adversely affect our Financial Performance.
The supply of skilled labor may be adversely affected by changes in immigration laws and policies.
The timing and quality of our construction activities depend upon the availability, cost and skill of contractors and
subcontractors and their employees. The supply of labor in the markets in which we operate could be adversely affected by
changes in immigration laws and policies as well as changes in immigration trends. Accordingly, it cannot be assured that a
sufficient supply of skilled labor will be available to us in the future. In addition, changes in federal and state immigration laws
and policies, or in the enforcement of current laws and policies, as a result of the current presidential administration may have
the effect of increasing our labor costs. The lack of adequate supply of skilled labor or a significant increase in labor costs
could materially and adversely affect our Financial Performance.
We could be responsible for employment-related liabilities with respect to our contractors’ employees.
Several other homebuilders have received inquiries from regulatory agencies concerning whether homebuilders using
contractors are deemed to be employers of the employees of such contractors under certain circumstances. Although
contractors are independent of the homebuilders that contract with them under normal management practices and the terms of
trade contracts and subcontracts within the homebuilding industry, if regulatory agencies reclassify the employees of
contractors as employees of homebuilders, homebuilders using contractors could be responsible for wage and hour labor laws,
workers’ compensation and other employment-related liabilities of their contractors. In 2015, the National Labor Relations
Board issued a decision holding that for labor law purposes a firm could under some circumstances be responsible as a joint
employer of its contractors’ employees. Although the National Labor Relations Board overruled this ruling in December 2017,
it could change its position again in the future. Governmental rulings that make us responsible for labor practices by our
subcontractors could create substantial exposure for us in situations that are not within our control. Even if we are not deemed
to be joint employers with our contractors, we may be subject to legislation, such as California Labor Code Section 2810.3 that
requires us to share liability with our contractors for the payment of wages and the failure to secure valid workers’
compensation coverage. In addition, a California law makes direct contractors liable for wages, fringe benefits, or other benefit
payments or contributions owed by a subcontractor that does not make these payments or contributions to its employees.
We may incur costs, liabilities and reputational damage if our subcontractors engage in improper construction
practices or install defective materials.
Despite our quality control efforts, we may discover that our subcontractors were engaging in improper construction
practices or installing defective materials in our homes. When we discover these issues, we, generally through our
subcontractors, repair the homes in accordance with our new home warranty and as required by law. We reserve a percentage
of the sales price of each home that we sell to meet our warranty and other legal obligations to our homebuyers. These reserves
are established based on market practices, our historical experiences, and our judgment of the qualitative risks associated with
the types of homes built. However, the cost of satisfying our warranty and other legal obligations in these instances may be
significantly higher than our warranty reserves, and we may be unable to recover the cost of repair from such
subcontractors. Regardless of the steps we take, we can in some instances be subject to fines or other penalties, and our
reputation may be materially and adversely affected.
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Raw material shortages and price fluctuations could cause delays and increase our costs.
We require raw materials to build our homes. The residential construction industry experiences serious raw material
shortages from time to time, including shortages in supplies of insulation, drywall, cement, steel, lumber and other building
materials. These shortages can be more severe during periods of strong demand for housing or during periods following natural
disasters that have a significant impact on existing residential and commercial structures. The cost of raw materials may also be
materially and adversely affected during periods of shortages or high inflation. Shortages and price increases could cause delays
in and increase our costs of home construction. We generally are unable to pass on increases in construction costs to
homebuyers who have already entered into home purchase contracts. Sustained increases in construction costs may adversely
affect our gross margins, which in turn could materially and adversely affect our Financial Performance.
Utility shortages or price increases could have an adverse impact on operations.
Certain of the markets in which we operate, including California, have experienced power shortages, including
mandatory periods without electrical power, as well as significant increases in utility costs. Reduced water supplies as a result
of drought conditions may negatively affect electric power generation. Additionally, municipalities may restrict or place
moratoriums on the availability of utilities, such as water and sewer taps. We may incur additional costs and may not be able to
complete construction on a timely basis if such utility shortages, restrictions, moratoriums and rate increases continue. In
addition, these utility issues may adversely affect the local economies in which we operate, which may reduce demand for
housing in those markets. Our Financial Performance may be materially and adversely impacted if further utility shortages,
restrictions, moratoriums or rate increases occur in our markets.
Some of our markets have been and may continue to be adversely affected by declining oil prices.
The significant decline in oil prices that began in 2014 has adversely affected and may continue to adversely affect the
economies in our Colorado and Houston markets, as energy is an important employment sector in both of those markets. As a
result, demand for our homes may be reduced in these markets and our Financial Performance could be materially and
adversely affected.
Government regulations and legal challenges may delay the start or completion of our communities, increase our
expenses or limit our building or other activities.
The approval of numerous governmental authorities must be obtained in connection with our development activities, and
these governmental authorities often have broad discretion in exercising their approval authority. We incur substantial costs
related to compliance with legal and regulatory requirements, and any increase in legal and regulatory requirements may cause
us to incur substantial additional costs, or in some cases cause us to determine that certain communities are not feasible for
development. Government agencies also routinely initiate audits, reviews or investigations of our business practices to ensure
compliance with applicable laws and regulations, which can cause us to incur costs or create other disruptions in our businesses
that can be significant.
Various federal, state and local statutes, ordinances, rules and regulations concerning building, health and safety,
environment, land use, zoning, density requirements, labor and wages, sales and similar matters apply to or affect the housing
industry. Projects that are not entitled may be subjected to periodic delays, changes in use, less intensive development or
elimination of development in certain specific areas due to government regulations. We may also be subject to periodic delays
or may be precluded entirely from developing in certain communities due to building moratoriums or “slow-growth” or “no-
growth” initiatives that could be implemented in the future. Local governments also have broad discretion regarding the
imposition of development fees and exactions for projects in their jurisdiction. Projects for which we have received land use
and development entitlements or approvals may still require a variety of other governmental approvals and permits during the
development process and can also be impacted adversely by unforeseen environmental, health, safety and welfare issues, which
can further delay these projects or prevent their development. We may also be required to modify our existing approvals
because of changes in local circumstances or applicable law. Further, we may experience delays and increased expenses as a
result of legal challenges to our proposed communities, or to permits or approvals required for such communities, whether
brought by governmental authorities or private parties. As a result, home sales could decline and costs could increase, which
could materially and adversely affect our Financial Performance.
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We may be unable to obtain suitable bonding for the development of our housing projects.
We are often required to provide bonds to governmental authorities and others to ensure the completion of our
projects. If we are unable to obtain required bonds in the future for our projects, or if we are required to provide credit
enhancements with respect to our current or future bonds, our Financial Performance could be materially and adversely
affected.
We are subject to environmental laws and regulations that may impose significant costs, delays, restrictions or
liabilities.
We are subject to a variety of local, state and federal statutes, rules and regulations concerning land use and the
protection of health and the environment, including those governing discharge of pollutants to water and air, impact on
wetlands, protection of flora and fauna, handling of or exposure to hazardous materials, including asbestos, and cleanup of
contaminated sites. We may be liable for the costs of removal, investigation, mitigation or remediation of hazardous or toxic
substances located at any property currently or formerly owned, leased or occupied by us, or at third-party sites to which we
have sent or send wastes for disposal, whether or not we caused or knew of such conditions. These conditions can also give rise
to claims by governmental authorities or other third parties, including for personal injury, property damage and natural
resources damages. Insurance coverage for such claims is nonexistent or impractical. The presence of any of these conditions,
or the failure to address any of these conditions properly, or any significant environmental incident, may materially and
adversely affect our ability to develop our properties or sell our homes, lots or land in affected communities or to borrow using
the affected land as security, or impact our reputation. Environmental impacts have been identified at certain of our active
communities, some of which will need to be addressed prior to or during development. We could incur substantial costs in
excess of amounts budgeted by us to address such impacts or other environmental or hazardous material conditions that may be
discovered in the future at our properties. Any failure to adequately address such impacts or conditions could delay, impede or
prevent our development projects.
The particular impact and requirements of environmental laws and regulations that apply to any given community vary
greatly according to the community location, the site’s environmental conditions and the development and use of the site. Any
failure to comply with applicable requirements could subject us to fines, penalties, third-party claims or other sanctions. We
expect that these environmental requirements will become increasingly stringent in the future. Compliance with, or liability
under, these environmental laws and regulations may result in delays, cause us to incur substantial compliance and other costs
and prohibit or severely restrict development, particularly in environmentally sensitive areas. In those cases where an
endangered or threatened species is involved and related agency rulemaking and litigation are ongoing, the outcome of such
rule-making and litigation can be unpredictable and can result in unplanned or unforeseeable restrictions on, or the prohibition
of, development and building activity in identified environmentally sensitive areas. In addition, project opponents can delay or
impede development activities by bringing challenges to the permits and other approvals required for projects and operations
under environmental laws and regulations.
As a result, we cannot assure that our costs, obligations and liabilities relating to environmental matters will not
materially and adversely affect our Financial Performance.
Changes in global or regional climate conditions and governmental response to such changes may limit, prevent or
increase the costs of our planned or future growth activities.
Projected climate change, if it occurs, may exacerbate the scarcity or presence of water and other natural resources in
affected regions, which could limit, prevent or increase the costs of residential development in certain areas. In addition, a
variety of new legislation is being enacted, or considered for enactment, at the federal, state and local level relating to energy
and climate change, and as climate change concerns continue to grow, legislation and regulations of this nature are expected to
continue. This legislation relates to items such as carbon dioxide emissions control and building codes that impose energy
efficiency standards. Government mandates, standards or regulations intended to mitigate or reduce greenhouse gas emissions
or projected climate change impacts could result in prohibitions or severe restrictions on land development in certain areas,
increased energy and transportation costs, and increased compliance expenses and other financial obligations to meet permitting
or land development or home construction-related requirements that we may be unable to fully recover (due to market
conditions or other factors), any of which could cause a reduction in our homebuilding gross margins and materially and
adversely affect our Financial Performance. Energy-related initiatives could similarly affect a wide variety of companies
throughout the United States and the world, and because our results of operations are heavily dependent on significant amounts
of raw materials, these initiatives could have an indirect adverse impact on our Financial Performance to the extent the
manufacturers and suppliers of our materials are burdened with expensive cap and trade or other climate related regulations.
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As a result, climate change impacts, and laws and land development and home construction standards, and/or the manner
in which they are interpreted or implemented, to address potential climate change concerns could increase our costs and have a
long-term adverse impact on our Financial Performance. This is a particular concern in the western United States, where some
of the most extensive and stringent environmental laws and residential building construction standards in the country have been
enacted. For example, California has enacted the Global Warming Solutions Act of 2006 to achieve the goal of reducing
greenhouse gas emissions to 1990 levels by 2020. As a result, California has adopted and is expected to continue to adopt
significant regulations to meet this goal.
We may be unable to develop our communities successfully or within expected timeframes.
Before a community generates any revenue, time and material expenditures are required to acquire land, obtain
development approvals and construct significant portions of project infrastructure, amenities, model homes and sales facilities.
It can take several years from the time we acquire control of a property to the time we make our first home sale on the site. Our
costs or the time required to complete development of our communities could increase beyond our estimates after commencing
the development process. Delays in the development of communities expose us to the risk of changes in market conditions for
homes. A decline in our ability to successfully develop and market our communities and to generate positive cash flow from
these operations in a timely manner could materially and adversely affect our Financial Performance and our ability to service
our debt and to meet our working capital requirements.
Poor relations with the residents of our communities could negatively impact our sales and reputation.
Residents of communities developed by us rely on us to resolve issues or disputes that may arise in connection with the
operation or development of our communities. Efforts we make to resolve these issues or disputes could be deemed
unsatisfactory by the affected residents, and subsequent actions by these residents could materially and adversely affect sales
and our reputation. In addition, we could be required to make material expenditures related to the settlement of such issues or
disputes or to modify our community development plans, which could materially and adversely affect our Financial
Performance.
The homebuilding industry is highly competitive, and if our competitors are more successful or offer better value to
potential homebuyers, our business could decline.
We operate in a very competitive environment that is characterized by competition from a number of other homebuilders
and land developers in each geographical market in which we operate. There are relatively low barriers to entry into our
business. We compete with numerous large national and regional homebuilding companies and with smaller local homebuilders
and land developers for, among other things, homebuyers, desirable land parcels, financing, raw materials and skilled
management and labor resources. If we are unable to compete effectively in our markets, our business could decline
disproportionately to the businesses of our competitors and our Financial Performance could be materially and adversely
affected.
Increased competition could hurt our business by preventing us from acquiring attractive land parcels on which to build
homes or making acquisitions more expensive, hindering our market share expansion and causing us to increase our selling
incentives and reduce our prices. Additionally, an oversupply of homes available for sale or a discounting of home prices could
materially and adversely affect pricing for homes in the markets in which we operate.
We also compete with the resale, or “previously owned,” home market, the size of which may change significantly as a
result of changes in the rate of home foreclosures, which is affected by changes in economic conditions both nationally and
locally.
We may be at a competitive disadvantage with respect to larger competitors whose operations are more geographically
diversified than ours, as these competitors may be better able to withstand any future regional downturn in the housing market.
Due to historical and other factors, some competitors may have a competitive advantage in marketing their products, securing
materials and labor at lower prices and allowing their homes to be delivered to homebuyers more quickly and at more favorable
prices. This competitive advantage could materially and adversely reduce our market share and limit our ability to continue to
expand our business as planned.
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Increases in our cancellation rate could have a negative impact on our home sales revenue and homebuilding
margins.
Our backlog reflects homes that may close in future periods. We have received a deposit from a homebuyer for each
home reflected in our backlog, and generally we have the right, subject to certain exceptions, to retain the deposit if the
homebuyer fails to comply with his or her obligations under the purchase contract, including as a result of state and local law,
the homebuyer’s inability to sell his or her current home or the homebuyer’s inability to make additional deposits required
under the purchase contract. Home order cancellations can result from a number of factors, including declines or slow
appreciation in the market value of homes, increases in the supply of homes available to be purchased, increased competition
and use of sales incentives by competitors, higher mortgage interest rates, homebuyers’ inability to sell their existing homes,
homebuyers’ inability to obtain suitable mortgage financing, including providing sufficient down payments, and adverse
changes in local, regional or national economic conditions. In these circumstances, homebuyers may terminate their existing
purchase contracts in order to negotiate for a lower price or because they cannot, or will not, complete the purchase. Our
cancellation rate was 18% and 15% for each of the years ended December 31, 2018 and 2017, respectively. Cancellation rates
may rise significantly in the future. If economic conditions become more uncertain, mortgage financing becomes less available
or expensive, or current homeowners find it difficult to sell their current homes, more homebuyers may cancel their purchase
contracts. An increase in the level of home order cancellations could have a material and adverse impact on our Financial
Performance.
Homebuilding is subject to products liability, home warranty and construction defect claims and other litigation in the
ordinary course of business that can be significant and may not be covered by insurance.
As a homebuilder, we are currently subject to products liability, home warranty, and construction defect claims arising in
the ordinary course of business, in addition to other potentially significant lawsuits, arbitration proceedings and other claims,
including breach of contract claims, contractual disputes, personal injury claims and disputes relating to defective title or
property misdescription. In connection with our merger with Weyerhaeuser Real Estate Company (“WRECO”) in 2014, we
also assumed responsibility for a substantial amount of WRECO’s pending and potential lawsuits, arbitration proceedings and
other claims, as well as any future claims relating to WRECO. Furthermore, since WRECO self-insured a significant portion of
its general liability exposure relating to its operations outside of California and Nevada prior to the merger, it is likely that most
of these claims will not be covered by insurance.
There can be no assurance that any current or future developments undertaken by us will be free from defects once
completed. Construction defects may occur on projects and developments and may arise during a significant period of time
after completion. Defects arising on a development attributable to us may lead to significant contractual or other liabilities. For
these and other reasons, we establish warranty, claim and litigation reserves that we believe are adequate based on historical
experience in the markets in which we operate and judgment of the risks associated with the types of homes, lots and land we
sell. We also obtain indemnities from contractors and subcontractors generally covering claims related to damages resulting
from faulty workmanship and materials and enroll a majority of these contractors and subcontractors in our Owner Controlled
Insurance Program (“OCIP”) providing general liability coverage for these types of claims, subject to self-insured retentions.
With respect to certain general liability exposures, including construction defects and related claims and product liability
claims, interpretation of underlying current and future trends, assessment of claims and the related liability and reserve
estimation process require us to exercise significant judgment due to the complex nature of these exposures, with each exposure
often exhibiting unique circumstances. Furthermore, once claims are asserted against us for construction defects, it is difficult to
determine the extent to which the assertion of these claims will expand geographically. Plaintiffs may seek to consolidate
multiple parties in one lawsuit or seek class action status in some of these legal proceedings with potential class sizes that vary
from case to case. Consolidated and class action lawsuits can be costly to defend and, if we were to lose any consolidated or
certified class action suit, it could result in substantial liability.
In addition to difficulties with respect to claim assessment and liability and reserve estimation, some types of claims may
not be covered by insurance or may exceed applicable coverage limits. Furthermore, contractual indemnities with contractors
and subcontractors can be difficult, or impossible, to enforce, and we may also be responsible for applicable self-insured
retentions with respect to our insurance policies. This is particularly true in our markets where we include our subcontractors on
our OCIP and our ability to seek indemnity for insured claims is significantly limited and it may be difficult for us to collect
self-insured retention contributions from these subcontractors. Furthermore, any product liability or warranty claims made
against us, whether or not they are viable, may lead to negative publicity, which could impact our reputation and future home
sales.
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We also currently conduct a material portion of our business in California, one of the most highly regulated and litigious
jurisdictions in the United States, which imposes a ten year, strict liability tail on many construction liability claims. As a result,
our potential losses and expenses due to litigation, new laws and regulations may be greater than those of our competitors who
have smaller California operations.
For these reasons, although we actively manage our claims and litigation and actively monitor our reserves and insurance
coverage, because of the uncertainties inherent in these matters, we cannot provide assurance that our insurance coverage,
indemnity arrangements and reserves will be adequate to cover liability for any damages, the cost of repairs and litigation, or
any other related expenses surrounding the current claims to which we are subject or any future claims that may arise. Such
damages and expenses, to the extent that they are not covered by insurance or redress against contractors and subcontractors,
could materially and adversely affect our Financial Performance.
Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties for
reasonable prices in response to changing economic, financial and investment conditions may be limited and we may be
forced to hold non-income producing properties for extended periods of time.
Real estate investments are relatively difficult to sell quickly. As a result, our ability to promptly sell one or more
properties in response to changing economic, financial and investment conditions is limited and we may be forced to hold non-
income producing assets for an extended period of time. We cannot predict whether we will be able to sell any property for the
price or on the terms that we set or whether any price or other terms offered by a prospective purchaser would be acceptable to
us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.
Fluctuations in real estate values may require us to write-down the book value of our real estate assets.
The homebuilding industry is subject to significant variability and fluctuations in real estate values. As a result, we may
be required to write-down the book value of our real estate assets in accordance with U.S. generally accepted accounting
principles (“GAAP”), and some of those write-downs could be material. Any material write-downs of assets could have a
material adverse effect on our Financial Performance.
The geographic concentration of our operations in certain regions subjects us to an increased risk of loss of revenue
or decreases in the market value of our land and homes in those regions from factors which may affect any of those regions.
At December 31, 2018 we had active selling communities in the states of Arizona, California, Colorado, Maryland,
Nevada, Texas, Virginia and Washington. Because our operations are limited to these areas, a prolonged economic downturn in
one or more of these areas, particularly within California, could have a material adverse effect on our Financial Performance
and could have a disproportionately greater impact on us than other homebuilders with more diversified operations. Moreover,
some or all of these regions could be affected by:
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severe weather;
natural disasters (such as earthquakes, hurricanes, floods or fires);
shortages in the availability of, or increased costs in obtaining, land, equipment, labor or building supplies;
changes to the population growth rates and therefore the demand for homes in these regions; and
changes in the regulatory and fiscal environment.
For the years ended December 31, 2018 and 2017, respectively, we generated a significant amount of our revenues and
profits from our California real estate inventory. During the downturn from 2008 to 2010, land values, the demand for new
homes and home prices declined substantially in California. In addition, California is facing significant unfunded liabilities and
may raise taxes and increase fees to meet these obligations. If these conditions in California persist or worsen, it could
materially and adversely affect our Financial Performance.
Inflation could materially and adversely affect us by increasing the costs of land, raw materials and labor, negatively
impacting housing demand, raising our costs of capital, and decreasing our purchasing power.
Inflation could materially and adversely affect us by increasing costs of land, raw materials and labor. We may respond
to inflation by increasing the sales prices of land or homes in order to offset any such increases in costs, maintain satisfactory
margins or realize a satisfactory return on our investment. However, if the market has an oversupply of homes relative to
demand, prevailing market prices may prevent us from doing so. In addition, inflation is often accompanied by higher interest
rates, which historically have had a negative impact on housing demand and the real estate industry generally and which could
materially and adversely impact potential homebuyers’ ability to obtain mortgage financing on favorable terms. In such an
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environment, we may not be able to raise prices sufficiently to keep up with the rate of inflation and our margins and returns
could decrease. Additionally, if we are required to lower home prices to meet demand, the value of our land inventory may
decrease. Inflation may also raise our costs of capital and decrease our purchasing power, making it more difficult to maintain
sufficient funds to operate our business. Current or future efforts by the government to stimulate the economy may increase the
risk of significant inflation and its adverse impact on our Financial Performance.
Acts of war, terrorism or outbreaks of contagious disease may seriously harm our business.
Acts of war, any outbreak or escalation of hostilities between the United States and any foreign power, acts of terrorism,
or outbreaks of contagious diseases, such as Ebola, may cause disruption to the U.S. economy, or the local economies of the
markets in which we operate, cause shortages of building materials, increase costs associated with obtaining building materials,
result in building code changes that could increase costs of construction, affect job growth and consumer confidence, or cause
economic changes that we cannot anticipate, all of which could reduce demand for our homes and materially and adversely
impact our Financial Performance.
Laws and regulations governing the residential mortgage, title insurance, and property and casualty insurance
industries could materially and adversely affect our Financial Performance.
We have established a joint venture to provide mortgage related services to homebuyers along with a wholly owned title
agency and a wholly owned property and casualty insurance agency. The residential mortgage lending, title insurance and
property and casualty insurance industries are heavily regulated. Changes to existing laws or regulations or adoption of new
laws or regulations could require us to incur significant compliance costs. A material failure to comply with any of these laws
or regulations could result in the loss or suspension of required licenses or other approvals, the imposition of monetary
penalties, and restitution awards or other relief. In addition, we could be subject to individual or class action litigation alleging
violations of these laws and regulations. Any of these could result in substantial costs and we could incur judgments or enter
into settlements of claims that could have a material adverse effect on our business. Any of these outcomes could materially
and adversely affect our Financial Performance.
We are subject to litigation and claims that could materially and adversely affect us.
Lawsuits, claims and proceedings have been, or in the future may be, instituted or asserted against us in the normal
course of business. Some of these claims may result in significant defense costs and potentially significant judgments against
us, some of which are not, or cannot be, insured against. We generally intend to defend ourselves vigorously. However,
litigation is inherently uncertain and we cannot be certain of the ultimate outcomes of any claims that may arise. To resolve
these matters, we may have to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments
and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby materially and adversely
affect our Financial Performance. Certain litigation or the resolution of certain litigation may affect the availability or cost of
some of our insurance coverage, which could materially and adversely impact us, expose us to increased risks that would be
uninsured, and materially and adversely impact our ability to attract directors and officers. Uncertainty with respect to claims
or litigation may adversely affect the availability and costs of future financings and may materially and adversely affect the
trading prices of our outstanding securities.
Information technology failures and data security breaches could harm our business.
We use information technology and other computer resources to carry out important operational and marketing activities
as well as maintain our business records. Many of these resources are provided to us or are maintained on our behalf by third-
party service providers pursuant to agreements that specify certain security and service level standards. Our ability to conduct
our business may be materially and adversely impaired if our computer resources are compromised, degraded, damaged or fail,
whether due to a virus or other harmful circumstance, intentional penetration or disruption of our information technology
resources by a third-party, natural disaster, hardware or software corruption or failure or error (including a failure of security
controls incorporated into or applied to such hardware or software), telecommunications system failure, service provider error
or failure, intentional or unintentional personnel actions (including the failure to follow our security protocols), or lost
connectivity to its networked resources.
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A significant and extended disruption in the functioning of these resources could damage our reputation and cause us to
lose homebuyers, sales and revenue, result in the unintended public disclosure or the misappropriation of proprietary, personal
and confidential information (including information about our homebuyers and business partners), and require us to incur
significant expense to address and resolve these kinds of issues. The release of confidential information may also lead to
litigation or other proceedings against us by affected individuals, business partners and/or regulators, and the outcome of such
proceedings, which could include penalties or fines, could materially and adversely affect our Financial Performance. In
addition, the costs of maintaining adequate protection against such threats, depending on their evolution, pervasiveness and
frequency and/or government-mandated standards or obligations regarding protective efforts, could be material to our Financial
Performance.
A major health and safety incident relating to our business could be costly in terms of potential liabilities and
reputational damage.
Building sites are inherently dangerous, and operating in the homebuilding and land development industry poses certain
inherent health and safety risks. Due to health and safety regulatory requirements and the number of our projects, health and
safety performance is critical to the success of all areas of our business.
Any failure in health and safety performance may result in penalties for non-compliance with relevant regulatory
requirements or litigation, and a failure that results in a major or significant health and safety incident is likely to be costly in
terms of potential liabilities incurred as a result. Such a failure could generate significant negative publicity and have a
corresponding impact on our reputation, our relationships with relevant regulatory agencies, governmental authorities and local
communities, and our ability to win new business, which in turn could materially and adversely affect our Financial
Performance.
Increases in taxes or government fees could increase our costs, which could materially and adversely affect us.
Increases in real estate taxes and other state and local government fees, such as development or impact fees, fees
imposed on developers to fund schools, open space, road improvements, and other public improvements, and fees imposed on
developers to provide low- and moderate-income housing, could increase our costs and have an adverse effect on our
operations, which could have a material adverse effect on our Financial Performance. In addition, increases in local real estate
taxes could adversely affect the purchasing decisions of potential homebuyers, who may consider those costs in determining
whether to make a new home purchase and decide, as a result, not to purchase one of our homes, which could have a material
adverse effect on our Financial Performance.
Risks Related to Our Indebtedness
Our use of leverage in executing our business strategy exposes us to significant risks.
We employ what we believe to be prudent levels of leverage to finance the acquisition and development of our lots and
construction of our homes. Our existing indebtedness is recourse to us and we anticipate that future indebtedness will likewise
be recourse.
Our board of directors considers a number of factors when evaluating our level of indebtedness and when making
decisions regarding the incurrence of new indebtedness, including the purchase price of assets to be acquired with debt
financing, the estimated market value of such assets and the ability of the particular assets, and our company as a whole, to
generate cash flow to cover the expected debt service.
Incurring substantial debt subjects us to many risks that, if realized, would materially and adversely affect our Financial
Performance, including the risks that:
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it may be more difficult for us to satisfy our obligations with respect to our debt or to our other creditors;
our cash flow from operations may be insufficient to make required payments of principal of and interest on our
debt, which is likely to result in acceleration of our debt;
our debt may increase our vulnerability to adverse economic and industry conditions, including fluctuations in
market interest rates, with no assurance that investment yields will increase with higher financing cost,
particularly in the case of debt with a floating interest rate;
our debt may limit our ability to obtain additional financing to fund capital expenditures and acquisitions,
particularly when the availability of financing in the capital markets is limited;
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we may be required to dedicate a portion of our cash flow from operations to payments on our debt, thereby
reducing funds available for operations and capital expenditures, future investment opportunities or other
purposes;
in the case of secured indebtedness, we could lose our ownership interests in our land parcels or other assets
because defaults thereunder may result in foreclosure actions initiated by lenders;
our debt may limit our ability to buy back our common stock or pay cash dividends;
our debt may limit our flexibility in planning for, or reacting to, changes in our business and the industry in
which we operate, thereby limiting our ability to compete with companies that are not as highly leveraged; and
the terms of any refinancing may not be as favorable as the terms of the debt being refinanced.
We cannot make any assurances that our business will generate sufficient cash flow from operations or that future
borrowings will be available to us through capital markets financings or otherwise in an amount sufficient to enable us to
service or refinance our indebtedness, or to fund our other liquidity needs. We may also need to refinance all or a portion of our
existing or future indebtedness on or before its maturity, and we cannot make any assurances that we will be able to refinance
any of our indebtedness on commercially reasonable terms or at all. If, at the time of any refinancing, prevailing interest rates or
other factors result in higher interest rates on the refinanced debt, increases in interest expense could materially and adversely
affect our Financial Performance. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of
our assets on disadvantageous terms, potentially resulting in significant losses.
We may incur additional indebtedness in order to finance our operations or to repay existing indebtedness. If we cannot
service our indebtedness, we will risk losing to foreclosure some or all of our assets that may be pledged to secure our
obligations and we may have to take actions such as selling assets, seeking additional debt or equity financing or reducing or
delaying capital expenditures, strategic acquisitions, investments and alliances. We cannot make any assurances that any such
actions, if necessary, could be effected on commercially reasonable terms or at all, or on terms that would be advantageous to
our stockholders or on terms that would not require us to breach the terms and conditions of our existing or future debt
agreements. Additionally, unsecured debt agreements may contain specific cross-default provisions with respect to specified
other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other loans in some
circumstances. Defaults under our debt agreements could materially and adversely affect our Financial Performance.
We may require significant additional capital in the future and may not be able to secure adequate funds on
acceptable terms.
The expansion and development of our business may require significant additional capital, which we may be unable to
obtain, to fund our operating expenses, including working capital needs.
We may fail to generate sufficient cash flow from the sales of our homes and land to meet our cash requirements. To a
large extent, our cash flow generation ability is subject to general economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control. Further, our capital requirements may vary materially from those currently planned if,
for example, our revenues do not reach expected levels or we have to incur unforeseen capital expenditures and make
investments to maintain our competitive position. If this is the case, we may need to refinance all or a portion of our debt on or
before its maturity, or obtain additional equity or debt financing sooner than anticipated, which could materially and adversely
affect our liquidity and financial condition if financing cannot be secured on reasonable terms. As a result, we may have to
delay or abandon some or all of our development and expansion plans or otherwise forego market opportunities.
Our access to additional third-party sources of financing will depend, in part, on:
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general market conditions;
the market’s perception of our growth potential, including relative to other opportunities;
with respect to acquisition and/or development financing, the market’s perception of the value of the land
parcels to be acquired and/or developed;
our corporate credit rating and ratings of our senior notes;
our current debt levels;
our current and expected future earnings;
our cash flow;
pending litigation and claims; and
the market price per share of our common stock.
During the most recent economic downturn, domestic financial markets experienced unusual volatility, uncertainty and a
restricting of liquidity in both the debt and equity capital markets. Credit spreads for major sources of capital widened
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significantly during the U.S. credit crisis as investors demanded a higher risk premium. In the event of another economic
downturn or if general economic conditions should worsen, potential lenders may be unwilling or unable to provide us with
suitable financing or may charge us prohibitively high fees in order to obtain financing. As a result, depending on market
conditions at the relevant time, we may have to rely more heavily on less efficient forms of debt financing that require a larger
portion of our cash flow from operations to service, thereby reducing funds available for our operations, future business
opportunities and other purposes. Investment returns on our assets and our ability to make acquisitions could be materially and
adversely affected by our inability to secure additional financing on reasonable terms, if at all. Additionally, if we cannot obtain
additional financing to fund the purchase of land under our option contracts or purchase contracts, we may incur contractual
penalties and fees. Any difficulty in obtaining sufficient capital for planned development expenditures could also cause project
delays and any such delay could result in cost increases. Any of the foregoing factors could materially and adversely affect our
Financial Performance.
Our access to capital and our ability to obtain additional financing could be affected by any downgrade of our credit
ratings.
Our corporate credit rating and ratings of our senior notes affect, among other things, our ability to access new capital,
especially debt, and the costs of that new capital. A substantial portion of our access to capital is through the issuance of senior
notes, of which we have $1.4 billion outstanding, net of debt issuance costs, as of December 31, 2018. Among other things, we
may rely on proceeds of debt issuances to pay the principal of existing senior notes when they mature. Negative changes in the
ratings of our senior notes could make it difficult for us to sell senior notes in the future and could result in more stringent
covenants and higher interest rates with regard to new senior notes we issue.
Our current financing arrangements contain, and our future financing arrangements likely will contain, restrictive
covenants relating to our operations.
Our current financing arrangements contain, and the financing arrangements we may enter into in the future will likely
contain, covenants affecting our ability to, among other things:
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incur or guarantee additional indebtedness;
make certain investments;
reduce liquidity below certain levels;
pay dividends or make distributions on our capital stock;
sell assets, including capital stock of restricted subsidiaries;
agree to payment restrictions affecting our restricted subsidiaries;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
enter into transactions with our affiliates;
incur liens;
engage in sale-leaseback transactions; and
designate any of our subsidiaries as unrestricted subsidiaries.
If we fail to meet or satisfy any of these covenants in our debt agreements, we would be in default under these
agreements, which could result in a cross-default under other debt agreements, and our lenders could elect to declare
outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and enforce
their respective interests against existing collateral. A default also could significantly limit our financing alternatives, which
could cause us to curtail our investment activities and/or dispose of assets when we otherwise would not choose to do so. If we
default on several of our debt agreements or any single significant debt agreement, it could materially and adversely affect our
Financial Performance. These and certain other restrictions could also limit our ability to plan for or react to market conditions,
meet capital needs or make acquisitions or otherwise restrict our activities or business plans.
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Higher interest rates on our debt may materially and adversely affect our Financial Performance.
We employ what we believe to be prudent levels of leverage to finance the acquisition and development of our lots and
construction of our homes. Some of our current debt has, and any additional debt we subsequently incur may have, a floating
rate of interest. In December 2018, the FOMC raised the target range for the federal funds rate from 2¼ percent to 2½ percent.
We are unable to predict if, or when, the FOMC will announce further increases and the impact of any such increases on our
floating rate interest rates. Higher interest rates could increase debt service requirements on our current floating rate debt and
on any floating rate debt we may subsequently incur, and could reduce funds available for operations, future business
opportunities or other purposes. If we need to repay existing debt during periods of rising interest rates, we could be required to
refinance our then-existing debt on unfavorable terms, or liquidate one or more of our assets to repay such debt at times which
may not permit realization of the maximum return on such assets and could result in a loss. The occurrence of either or both of
these events could materially and adversely affect our Financial Performance.
Failure to hedge effectively against interest rate changes may materially and adversely affect our Financial
Performance.
We may obtain one or more forms of interest rate protection–in the form of swap agreements, interest rate cap contracts
or similar agreements–to hedge against the possible negative effects of interest rate fluctuations. However, we cannot assure
stockholders that any hedging will adequately relieve the adverse effects of interest rate increases or that counterparties under
these agreements will honor their obligations thereunder. In addition, we may be subject to risks of default by hedging
counterparties. Adverse economic conditions could also cause the terms on which we borrow to be unfavorable. We could be
required to liquidate one or more of our assets at times which may not permit us to receive an attractive return on our assets in
order to meet our debt service obligations. Failure of our hedging mechanisms could materially and adversely affect our
Financial Performance.
Risks Related to Our Organization and Structure
We are and will continue to be dependent on key personnel and certain members of our management team.
Our business involves complex operations and requires a management team and employee workforce that is
knowledgeable and expert in many areas necessary for its operations. Our success and ability to obtain, generate and manage
opportunities depends to a significant degree upon the contributions of key personnel, including, but not limited to, Douglas
Bauer, our Chief Executive Officer, Thomas Mitchell, our President and Chief Operating Officer, and Michael Grubbs, our
Chief Financial Officer and Treasurer. Our investors must rely to a significant extent upon the ability, expertise, judgment and
discretion of this management team and other key personnel, and their loss or departure could be detrimental to our future
success. We have entered into employment agreements with Messrs. Bauer, Mitchell and Grubbs. The initial term of these
agreements expired in November 2018 and automatically renews for additional one-year periods unless either party gives
written notice of non-renewal at least 60 days in advance. There is no assurance that these executives will remain employed
with us. Additionally, key employees working in the real estate, homebuilding and construction industries are highly sought
after and failure to attract and retain such personnel may materially and adversely affect the standards of our future service and
may have a material and adverse impact on our Financial Performance.
Our ability to retain our management team and key personnel or to attract suitable replacements should any members of
our management team leave is dependent on the competitive nature of the employment market. The loss of services from any
member of our management team or key personnel could materially and adversely impact our Financial Performance. Further,
the process of attracting and retaining suitable replacements for key personnel whose services we may lose would result in
transition costs and would divert the attention of other members of our management from existing operations. Moreover, such
a loss could be negatively perceived in the capital markets, which could, in turn, materially and adversely affect the market
price of our common stock.
We have not obtained key man life insurance that would provide us with proceeds in the event of death or disability of
any of our key personnel.
Termination of the employment agreements with the members of our management team could be costly and prevent a
change in control of our company.
Our employment agreements with Messrs. Bauer, Mitchell and Grubbs each provide that if their employment with us
terminates under certain circumstances, we may be required to pay them significant amounts of severance compensation,
thereby making it costly to terminate their employment. Furthermore, these provisions could delay or prevent a transaction or a
change in control of our company that might involve a premium paid for shares of our common stock or otherwise be in the
best interests of our stockholders, which could materially and adversely affect the market price of our common stock.
- 36 -
Certain anti-takeover defenses and applicable law may limit the ability of a third-party to acquire control of us.
Our charter, bylaws and Delaware law contain provisions that may delay or prevent a transaction or a change in control
of our company that might involve a premium paid for shares of our common stock or otherwise be in the best interests of our
stockholders, which could materially and adversely affect the market price of our common stock. Certain of these provisions
are described below.
Selected provisions of our charter and bylaws.
Our charter and/or bylaws contain anti-takeover provisions that:
•
authorize our board of directors, without further action by the stockholders, to issue up to 50,000,000 shares of
preferred stock in one or more series, and with respect to each series, to fix the number of shares constituting
that series and establish the rights and other terms of that series;
require that actions to be taken by our stockholders may be taken only at an annual or special meeting of our
stockholders and not by written consent;
specify that special meetings of our stockholders can be called only by our board of directors, the chairman of
our board of directors or our chief executive officer (or if there is no chief executive officer, the president);
establish advance notice procedures for stockholders to submit nominations of candidates for election to our
board of directors and other proposals to be brought before a stockholders meeting;
provide that our bylaws may be amended by our board of directors without stockholder approval;
allow our directors to establish the size of our board of directors by action of our board, subject to a minimum
of three members;
provide that vacancies on our board of directors or newly created directorships resulting from an increase in the
number of our directors may be filled only by a majority of directors then in office, even though less than a
quorum;
do not give the holders of our common stock cumulative voting rights with respect to the election of directors;
and
prohibit us from engaging in certain business combinations with any “interested stockholder” unless specified
conditions are satisfied as described below.
•
•
•
•
•
•
•
•
Selected provisions of Delaware law.
We have opted out of Section 203 of the Delaware General Corporation Law, which regulates corporate
takeovers. However, our charter contains provisions that are similar to Section 203. Specifically, our charter provides that we
may not engage in certain “business combinations” with any “interested stockholder” for a three-year period following the time
that the person became an interested stockholder, unless:
•
•
•
prior to the time that person became an interested stockholder, our board of directors approved either the
business combination or the transaction which resulted in the person becoming an interested stockholder;
upon consummation of the transaction which resulted in the person becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding certain shares; or
at or subsequent to the time the person became an interested stockholder, the business combination is approved
by our board of directors and by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder.
Generally, a business combination includes a merger, consolidation, asset or stock sale or other transaction resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions, an interested stockholder is a person who, together
with that person’s affiliates and associates, owns, or within the previous three years owned, 15% or more of our voting stock.
This provision could prohibit or delay mergers or other takeover or change in control attempts with respect to us and,
accordingly, may discourage attempts to acquire us.
- 37 -
We may change our operational policies, investment guidelines and our business and growth strategies without
stockholder consent, which may subject us to different and more significant risks in the future.
Our board of directors will determine our operational policies, investment guidelines and our business and growth
strategies. Our board of directors may make changes to, or approve transactions that deviate from, those policies, guidelines
and strategies without a vote of, or notice to, our stockholders. This could result in us conducting operational matters, making
investments or pursuing different business or growth strategies than those contemplated currently. Under any of these
circumstances, we may expose ourselves to different and more significant risks in the future, which could have a material
adverse effect on our Financial Performance.
If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our
financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial results, which could
materially and adversely affect us and the market price of our common stock.
A system of internal control over financial reporting, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. The design of control systems reflects
resource constraints and the benefits of controls must be considered in relationship to their costs. Accordingly, there can be no
assurance that all control issues or fraud will be detected. We cannot be certain that we will be successful in maintaining
adequate internal control over our financial reporting and financial processes. Furthermore, as we continue to grow our
business, our internal controls will become more complex, and we will require significantly more resources to ensure that our
internal controls remain effective. Additionally, the existence of any material weakness or significant deficiency may require
management to devote significant time and incur significant expense to remediate any such material weaknesses, or significant
deficiencies and management may not be able to remediate any such material weaknesses or significant deficiencies in a timely
manner. There is no assurance that our independent auditor will be able to provide an unqualified attestation report on internal
control over financial reporting in future years. If our independent auditor is unable to provide an unqualified attestation report,
investors could lose confidence in the reliability of our financial statements, and our stock price could be materially and
adversely affected. The existence of any material weakness in our internal control over financial reporting could result in errors
in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting
obligations, and cause stockholders to lose confidence in our reported financial information, all of which could materially and
adversely affect us and the market price for our common stock.
Changes in accounting rules, assumptions and/or judgments could delay the dissemination of our financial
statements and cause us to restate prior period financial statements.
Accounting rules and interpretations for certain aspects of our operations are highly complex and involve significant
assumptions and judgment. These complexities could lead to a delay in the preparation and dissemination of our financial
statements. Furthermore, changes in accounting rules and interpretations or in our accounting assumptions and/or judgments,
such as asset impairments, could significantly impact our financial statements. In some cases, we could be required to apply a
new or revised standard retroactively, resulting in restating prior period financial statements. Any of these circumstances could
have a material adverse effect on our Financial Performance.
Our joint venture investments could be materially and adversely affected by lack of sole decision making authority,
reliance on co-venturers’ financial condition and disputes between us and our co-venturers.
We have co-invested, and we may co-invest in the future, with third parties through partnerships, joint ventures or other
entities, acquiring noncontrolling interests in or sharing responsibility for managing the affairs of land acquisition and/or
developments. We will not be in a position to exercise sole decision-making authority regarding the land acquisitions and/or
developments undertaken by our current joint ventures and any future joint ventures in which we may co-invest, and our
investment may be illiquid due to our lack of control. Investments in partnerships, joint ventures or other entities may, under
certain circumstances, involve risks not present when a third-party is not involved, including the possibility that partners or co-
venturers might become bankrupt, fail to fund their share of required capital contributions or otherwise meet their contractual
obligations, make poor business decisions or block or delay necessary decisions. Partners or co-venturers may have economic
or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take
actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such
as a sale, because neither us nor the partner or co-venturer would have full control over the partnership or joint
venture. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our
expenses and prevent our officers and/or directors from focusing their time and effort on our business. In addition, we may in
certain circumstances be liable for the actions of its third-party partners or co-venturers.
- 38 -
Risks Related to Ownership of Our Common Stock
We do not intend to pay dividends on our common stock for the foreseeable future.
We currently intend to retain our future earnings, if any, to finance the development and expansion of our business and,
therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay
dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations,
capital requirements, legal requirements, restrictions contained in any financing instruments and such other factors as our board
of directors deems relevant. Accordingly, stockholders may need to sell their shares of our common stock to realize a return on
their investment, and stockholders may not be able to sell their shares at or above the price they paid for them.
Future sales of our common stock or other securities convertible into our common stock could cause the market value
of our common stock to decline and could result in dilution of stockholders’ shares.
Our board of directors is authorized, without stockholder approval, to cause us to issue additional shares of our common
stock or to raise capital through the issuance of preferred stock (including equity or debt securities convertible into common
stock), options, warrants and other rights, on terms and for consideration as our board of directors in its sole discretion may
determine. Sales of substantial amounts of our common stock could cause the market price of our common stock to decrease
significantly. We cannot predict the effect, if any, of future sales of our common stock, or the availability of our common stock
for future sales, on the value of our common stock.
Future offerings of debt securities, which would rank senior to our common stock in the event of our bankruptcy or
liquidation, and future offerings of equity securities that may be senior to our common stock for the purposes of dividend
and liquidating distributions, may adversely affect the market price of our common stock.
In the future, we may make additional offerings of debt securities or additional offerings of equity securities. Upon
bankruptcy or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other
borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity
offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Our
preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments or both that
could limit our ability to make a dividend distribution to the holders of our common stock. Our decision to issue securities in
any future offering will depend on market conditions and other factors beyond our control. As a result, we cannot predict or
estimate the amount, timing or nature of our future offerings, and purchasers of our common stock bear the risk of our future
offerings reducing the market price of our common stock and diluting their ownership interest in our company.
Non-U.S. holders may be subject to United States federal income tax on gain realized on the sale or disposition of
shares of our common stock.
We believe that we are, and will remain, a “United States real property holding corporation” for United States federal
income tax purposes. As a result, a non-U.S. holder generally will be subject to United States federal income tax on any gain
realized on a sale or disposition of shares of our common stock unless our common stock is regularly traded on an established
securities market (such as the NYSE) and such non-U.S. holder did not actually or constructively hold more than 5% of our
common stock at any time during the shorter of (a) the five-year period preceding the date of the sale or disposition and (b) the
non-U.S. holder’s holding period in such stock. A non-U.S. holder also will be required to file a United States federal income
tax return for any taxable year in which it realizes a gain from the disposition of our common stock that is subject to United
States federal income tax. A purchaser of the stock in a United States real property holding corporation from a non-U.S. holder
generally will be required to withhold and remit to the Internal Revenue Service (the “IRS”) 15% of the purchase price.
However, a purchaser of our stock from a non-U.S. holder will generally not be required to withhold tax on the sale if our
common stock is regularly traded on an established securities market (such as the NYSE), even if the non-U.S. transferor holds
or has held more than 10% of our common stock and thus is taxed on any gain under the rules described above.
No assurance can be given that our common stock will remain regularly traded on an established securities market in the
future. Non-U.S. holders should consult their tax advisors concerning the consequences of disposing of shares of our common
stock.
- 39 -
There is no assurance that the existence of a stock repurchase program will result in repurchases of our common
stock or enhance long term stockholder value, and repurchases, if any, could affect our stock price and increase its volatility
and will diminish our cash reserves.
On February 21, 2019, our board of directors approved a share repurchase program (the “2019 Repurchase Program”),
authorizing the repurchase of shares of common stock with an aggregate value of up to $100 million through March 31, 2020.
Purchases of common stock pursuant to the 2019 Repurchase Program may be made in open market transactions effected
through a broker-dealer at prevailing market prices, in block trades, or by other means in accordance with federal securities
laws, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 under the Exchange Act. We
are not obligated under the 2019 Repurchase Program to repurchase any specific number or dollar amount of shares of common
stock, and we may modify, suspend or discontinue the 2019 Repurchase Program at any time. Our management will determine
the timing and amount of repurchase in its discretion based on a variety of factors, such as the market price of our common
stock, corporate requirements, general market economic conditions and legal requirements.
Repurchases pursuant to the 2019 Repurchase Program or any other stock repurchase program we adopt in the future
could affect our stock price and increase its volatility and will reduce the market liquidity for our stock. The existence of a
stock repurchase program could also cause our stock price to be higher than it would be in the absence of such a
program. Additionally, these repurchases will diminish our cash reserves, which could impact our ability to pursue possible
future strategic opportunities and acquisitions and would result in lower overall returns on our cash balances. There can be no
assurance that any stock repurchases will, in fact, occur, or, if they occur, that they will enhance stockholder value. Although
stock repurchase programs is intended to enhance long term stockholder value, short-term stock price fluctuations could reduce
the effectiveness of these repurchases.
Item 1B.
Unresolved Staff Comments
Not applicable.
Item 2.
Properties
We lease our corporate headquarters located in Irvine, California. Our homebuilding division offices and financial
services operations are located in leased space in the markets where we conduct business.
We believe that such properties, including the equipment located therein, are suitable and adequate to meet the needs of
our businesses.
Item 3.
Legal Proceedings
On April 3, 2017, Pardee Homes was named as a defendant in a lawsuit filed in San Diego County Superior Court by
Scripps Health (“Scripps”) related to the April 1989 sale by Pardee Homes of real property located in Carmel Valley, California
to Scripps pursuant to a purchase agreement dated December 18, 1987 (as amended, the “Purchase Agreement”). In March
2003, Scripps contacted Pardee Homes and alleged Pardee Homes had breached a covenant in the Purchase Agreement by
failing to record a restriction against the development of the surrounding property then owned by Pardee Homes for medical
office use. In November 2003, the parties entered into a tolling agreement, pursuant to which the parties agreed to toll any
applicable statutes of limitation from November 3, 2003 until the expiration of the agreement. The tolling agreement did not
revive any cause of action already time barred by a statute of limitation as of November 3, 2003. The tolling agreement was
terminated as of February 21, 2017. Pardee Homes became an indirect, wholly owned subsidiary of TRI Pointe on July 7, 2014
in connection with TRI Pointe’s acquisition of WRECO.
On May 18, 2018, Pardee Homes filed a motion for summary judgment in the action, which had a rescheduled hearing
date of September 28, 2018. At the hearing, the court denied the motion for summary judgment. On October 22, 2018, Pardee
Homes filed with an appellate court a writ of mandate appealing the trial court's denial of the motion for summary judgment,
which writ of mandate was denied by the appellate court. On January 30, 2019, Pardee Homes and Scripps entered into a
confidential settlement agreement and mutual general release pursuant to which Pardee Homes agreed to pay a settlement
amount of $17.5 million and Scripps agreed to dismiss the lawsuit with prejudice. The parties also agreed to mutual general
releases of all claims. On February 4, 2019, Pardee Homes paid the $17.5 million settlement amount to Scripps, and Scripps
filed a request for dismissal of the lawsuit on February 7, 2019, which was entered by the court on February 21, 2019.
Item 4.
Mine Safety Disclosures
Not applicable.
- 40 -
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
PART II.
Our common stock is listed on the NYSE under the ticker symbol “TPH”.
Issuer Purchases of Equity Securities
On February 16, 2018, our board of directors approved a share repurchase program (the “2018 Repurchase Program”),
authorizing the repurchase of shares of common stock with an aggregate value of up to $100 million through March 31, 2019.
On August 22, 2018, our board of directors authorized the repurchase of up to an additional $100 million through March 31,
2019, increasing the aggregate value of shares of common stock authorized to be repurchased under the 2018 Repurchase
Program to $200 million from $100 million.
During the three months ended December 31, 2018, we repurchased the following shares under the 2018 Repurchase
Program:
Total number of
shares purchased
Average price
paid per share
Total number of shares
purchased as part of
publicly announced
program
Approximate dollar
value of shares that
may yet be
purchased under
the program (1)
October 1, 2018 to October 31, 2018
540,600
$
12.42
540,600
$
53,937,746
November 1, 2018 to November 30, 2018
December 1, 2018 to December 31, 2018
— $
— $
—
—
— $
— $
53,937,746
53,937,746
Total
540,600
$
12.42
540,600
(1) Subsequent to December 31, 2018 and through the date of this filing we did not repurchase any additional shares of
common stock under the 2018 Repurchase Program, and as noted below, the 2018 Repurchase Program was discontinued and
cancelled on February 21, 2019. During the year ended December 31, 2018, we repurchased 10,392,609 shares of common
stock at an average price of $14.05 for an aggregate dollar amount of $146.1 million. We repurchased 8,994,705 shares of
common stock at an average price of $12.48 for an aggregate dollar amount of $112.2 million during the year ended December
31, 2017.
On February 21, 2019, our board of directors discontinued and cancelled the 2018 Repurchase Program and approved
the 2019 Repurchase Program, authorizing the repurchase of shares of common stock with an aggregate value of up to $100
million through March 31, 2020. Purchases of common stock pursuant to the 2019 Repurchase Program may be made in open
market transactions effected through a broker-dealer at prevailing market prices, in block trades, or by other means in
accordance with federal securities laws, including pursuant to any trading plan that may be adopted in accordance with Rule
10b5-1 under the Exchange Act. We are not obligated under the 2019 Repurchase Program to repurchase any specific number
or dollar amount of shares of common stock, and we may modify, suspend or discontinue the 2019 Repurchase Program at any
time. Our management will determine the timing and amount of repurchase in its discretion based on a variety of factors, such
as the market price of our common stock, corporate requirements, general market economic conditions and legal requirements.
Through the date of the filing of this annual report on Form 10-K, no shares of common stock have been repurchased under the
2019 Repurchase Program.
Stockholder Return Performance Graph
The following performance graph shows a comparison of the cumulative total returns to stockholders of the Company, as
compared with the Standard & Poor’s 500 Composite Stock Index and the Dow Jones Industry Group-U.S. Home Construction
Index.
- 41 -
The above graph is based upon common stock and index prices calculated as of the dates indicated. The Company’s
common stock closing price on December 31, 2018 was $10.93 per share. The stock price performance of the Company’s
common stock depicted in the graph above represents past performance only and is not necessarily indicative of future
performance.
As of February 8, 2019, we had 83 holders of record of our common stock. We have not paid any dividends on our
common stock and currently intend to retain any future earnings to finance the development and expansion of our business and,
therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay
dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations,
capital requirements, legal requirements, restrictions contained in any financing instruments and such other factors as our board
of directors deems relevant. Accordingly, stockholders may need to sell their shares of our common stock to realize a return on
their investment, and stockholders may not be able to sell their shares at or above the price they paid for them. See Part I,
Item 1A, “Risk Factors—Risks Related to Ownership of Our Common Stock—We do not intend to pay dividends on our
common stock for the foreseeable future” of this annual report on Form 10-K.
- 42 -
Item 6.
Selected Financial Data
The following sets forth our selected financial and operating data on a historical basis. The following summary of
selected financial data should be read in conjunction with our consolidated financial statements and the related notes and with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” that are included elsewhere in
this annual report on Form 10-K. On July 7, 2014, we completed a merger with WRECO that was accounted for in accordance
with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. For accounting purposes, the merger
was treated as a “reverse acquisition” and WRECO was considered the accounting acquirer. Accordingly, WRECO is reflected
as the predecessor and acquirer and the following selected financial data reflect the historical financial data of WRECO, and
do not include the historical financial data of legacy TRI Pointe, for all periods presented prior to July 7, 2014. Subsequent to
July 7, 2014 and on a go forward basis, the selected financial data reflect the results of the combined company.
Statement of Operations Data:
Homebuilding:
Home sales revenue
Land and lot sales revenue
Other operations revenue
Total revenues
Cost of home sales
Cost of land and lot sales
Other operations expense
Sales and marketing
General and administrative
Homebuilding income from operations
Equity in (loss) income of unconsolidated entities
Transaction expenses
Other (loss) income, net
Year Ended December 31,
2018
2017
2016
2015
2014
(dollars in thousands, except per share amounts)
$3,244,087
$2,732,299
$2,329,336
$2,291,264
$1,646,274
8,758
8,164
74,269
2,333
72,272
2,314
101,284
7,601
47,660
9,682
3,261,009
2,808,901
2,403,922
2,400,149
1,703,616
2,536,899
2,173,251
1,836,327
1,808,776
1,318,617
25,435
3,174
187,267
155,030
353,204
14,888
2,298
137,066
137,764
343,634
(393)
(11,433)
—
(419)
—
151
17,367
2,247
127,903
124,119
295,959
179
—
312
35,089
4,360
116,217
120,825
314,882
1,460
—
858
37,906
3,346
103,600
92,901
147,246
(278)
(17,960)
(1,019)
Homebuilding income before income taxes
352,392
332,352
296,450
317,200
127,989
Financial Services:
Revenues
Expenses
Equity in income (loss) of unconsolidated entities
Financial services income (loss) before income taxes
Income before income taxes
Provision for income taxes
Net income
1,738
582
8,517
9,673
1,371
331
6,426
7,466
1,220
253
4,810
5,777
1,010
181
1,231
2,060
—
15
(10)
(25)
362,065
339,818
302,227
319,260
127,964
(90,552)
(152,267)
(106,094)
(112,079)
(43,767)
271,513
187,551
196,133
207,181
84,197
Net income attributable to noncontrolling interests
(1,602)
(360)
(962)
(1,720)
—
Net income available to common stockholders
$ 269,911
$ 187,191
$ 195,171
$ 205,461
$
84,197
Earnings per share
Basic
Diluted
$
$
1.82
1.81
$
$
1.21
1.21
$
$
1.21
1.21
$
$
1.27
1.27
$
$
0.58
0.58
- 43 -
Year Ended December 31,
2018
2017
2016
2015
2014
Operating Data-Owned Projects:
Net new home orders
New homes delivered
(dollars in thousands)
4,686
5,071
5,075
4,697
4,248
4,211
4,181
4,057
Average sales price of homes delivered
$
640
$
582
$
553
$
565
$
2,947
3,100
531
Cancellation rate
Average selling communities
Selling communities at end of period
Backlog at end of period, number of homes
18%
15%
15%
16%
16%
130.1
146
1,335
127.5
130
1,571
118.3
124
1,193
115.9
104
1,156
99.1
108
1,032
Backlog at end of period, aggregate sales value
$ 897,343
$ 1,032,776
$ 661,146
$ 697,334
$ 653,096
Balance Sheet Data (at period end):
Cash and cash equivalents
Real estate inventories
Total assets
Total debt, net
Total liabilities
Total equity
Year Ended December 31,
2018
2017
2016
2015
2014
(in thousands)
$
277,696
$
282,914
$
208,657
$
214,485
$
170,629
$ 3,216,059
$ 3,105,553
$ 2,910,627
$ 2,519,273
$ 2,280,183
$ 3,884,203
$ 3,805,381
$ 3,564,640
$ 3,138,071
$ 2,889,838
$ 1,410,804
$ 1,471,302
$ 1,382,033
$ 1,170,505
$ 1,138,493
$ 1,827,266
$ 1,875,054
$ 1,716,130
$ 1,451,608
$ 1,417,362
$ 2,056,937
$ 1,930,327
$ 1,848,510
$ 1,686,463
$ 1,472,476
- 44 -
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following should be read in conjunction with the sections of this annual report on Form 10-K entitled “Risk
Factors,” “Cautionary Note Concerning Forward-Looking Statements,” “Selected Financial Data,” “Business” and our
consolidated financial statements and related notes thereto included elsewhere in this annual report on Form 10-K. This
discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual
results and the timing of events may differ materially from those contained in these forward-looking statements due to a number
of factors, including those discussed in the sections entitled “Risk Factors” and “Legal Proceedings” elsewhere in this annual
report on Form 10-K.
Overview and Outlook
For the year ended December 31, 2018, deliveries increased 8% from the prior-year and average sales price increased
10%, resulting in a 19% increase in home sales revenue. Homebuilding gross margins increased 130 basis points to 21.8%
while sales and marketing expenses and general and administrative expenses increased 50 basis points to 10.6% of home sales
revenue. New home orders were down 8% compared to the prior-year, and backlog units at year end were down 15%
compared to the prior year end. An increase in the average sales price of backlog to $672,000 offset some of the backlog unit
decline, resulting in a 13% decrease in overall backlog dollar value.
Based on our new home order trends for the second half of 2018, we are seeing a softening of consumer motivation and
demand in many of the markets in which we operate. We believe that some of the recent order declines are due to seasonality,
while some of the declines are likely related to higher borrowing costs and the significant home price appreciation our industry
has experienced over the last few years. We further believe that some of the recent demand trends have been influenced by
general economic uncertainties hanging over the market, such as international trade relations, global economic uncertainty,
Federal Reserve policy and rising cyclical fears regarding the current market cycle position. We believe that a temporary
demand pullback is a normal consumer reaction, and we are continuing to monitor closely this dynamic in all of our markets
and focusing on pricing our products to market demand profiles. Even though overall housing market fundamentals remain
strong, we believe home buyer demand will remain slow compared to the exceptional market experienced in the first quarter of
2018.
We remain optimistic about the long-term outlook for our industry and our company due to the strength of the U.S.
economy, overall job growth and healthy consumer confidence, which, along with pent-up demand from young adults, we
believe will lead to growing household formations. In addition, the overall supply of new and existing homes on the market
remains at low levels, and finished lot availability in most of the markets in which we build remains constrained.
- 45 -
Consolidated Financial Data (in thousands, except share and per share amounts):
Homebuilding:
Home sales revenue
Land and lot sales revenue
Other operations revenue
Total revenues
Cost of home sales
Cost of land and lot sales
Other operations expense
Sales and marketing
General and administrative
Homebuilding income from operations
Equity in (loss) income of unconsolidated entities
Other (expense) income, net
Homebuilding income before income taxes
Financial Services:
Revenues
Expenses
Equity in income of unconsolidated entities
Financial services income before income taxes
Income before income taxes
Provision for income taxes
Net income
Net income attributable to noncontrolling interests
Net income available to common stockholders
Earnings per share
Basic
Diluted
Weighted average shares outstanding
Basic
Diluted
Year Ended December 31,
2018
2017
2016
$
$
$
$
3,244,087
8,758
8,164
3,261,009
2,536,899
25,435
3,174
187,267
155,030
353,204
(393)
(419)
352,392
1,738
582
8,517
9,673
362,065
(90,552)
271,513
(1,602)
269,911
1.82
1.81
$
$
$
$
2,732,299
74,269
2,333
2,808,901
2,173,251
14,888
2,298
137,066
137,764
343,634
(11,433)
151
332,352
1,371
331
6,426
7,466
339,818
(152,267)
187,551
(360)
187,191
1.21
1.21
$
$
$
$
2,329,336
72,272
2,314
2,403,922
1,836,327
17,367
2,247
127,903
124,119
295,959
179
312
296,450
1,220
253
4,810
5,777
302,227
(106,094)
196,133
(962)
195,171
1.21
1.21
148,183,431
149,004,690
154,134,411
155,085,366
160,859,782
161,381,499
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Net New Home Orders, Average Selling Communities and Monthly Absorption Rates by Segment
Year Ended December 31, 2018
Year Ended December 31, 2017
Percentage Change
Net New
Home
Orders
472
1,575
261
601
1,311
466
4,686
Average
Selling
Communities
12.0
35.9
6.9
29.1
32.1
14.1
130.1
Monthly
Absorption
Rates
3.3
3.7
3.2
1.7
3.4
2.8
3.0
Net New
Home
Orders
597
1,580
395
516
1,492
495
5,075
Average
Selling
Communities
14.8
29.9
7.5
30.4
32.0
12.9
127.5
Monthly
Absorption
Rates
Net New
Home
Orders
3.4
4.4
4.4
1.4
3.9
3.2
3.3
(21)%
— %
(34)%
16 %
(12)%
(6)%
(8)%
Average
Selling
Communities
(19)%
20 %
(8)%
(4)%
— %
9 %
2 %
Monthly
Absorption
Rates
(3)%
(16)%
(27)%
21 %
(13)%
(13)%
(9)%
Maracay
Pardee Homes
Quadrant Homes
Trendmaker Homes
TRI Pointe Homes
Winchester Homes
Total
- 46 -
Net new home orders for the year ended December 31, 2018 decreased 8% to 4,686, compared to 5,075 for the prior
year. The decrease in net new home orders was due to an overall 9% decrease in monthly absorption rates slightly offset by a
2% increase in average selling communities. Overall, the markets in which we operate demonstrated very strong demand
through the first half of the year with a slower monthly absorption pace throughout the second half of the year. The decline in
monthly absorption rates in the second half of the year was due to reduced overall demand resulting from rising mortgage
interest rates and affordability concerns in certain markets, most notably in Northern California communities at our TRI Pointe
Homes brand and in the Seattle area communities at our Quadrant Homes brand.
Maracay reported a 21% decrease in net new home orders driven by an 19% decrease in average selling communities
and a 3% decrease in monthly absorption rate. The 3.3 monthly absorption rate was the result of strong market fundamentals in
our Arizona markets and successful new product offerings during the year. The decrease in average selling communities was
due to the timing of community openings and closings compared to the prior year. We expect to experience community count
growth in 2019 with 8 new communities scheduled to open in the first half of 2019. Pardee Homes reported flat new home
orders due to a combination of a 16% decrease in monthly absorption rate offset by a 20% increase in average selling
communities. The increase in average selling communities was a result of increased community growth in the Los Angeles,
Inland Empire and Las Vegas markets. Monthly absorption rates decreased 16% due to rising mortgage interest rates and
affordability concerns during the year. Net new home orders decreased by 34% at Quadrant Homes largely due to the 27%
decrease in monthly absorption rate. Our Quadrant Homes brand and the general Seattle market have seen significant pricing
power over the past few years which led to affordability concerns by the consumer in the second half of 2018 that impacted our
monthly absorption rate. Trendmaker Homes increased net new home orders by 16% due to a 21% increase in monthly
absorption rate, partly offset by a 4% decrease in average selling communities. We experienced demand improvements in both
Austin and Houston during the current year which favorably impacted our monthly absorption rate. The acquisition of a Dallas
based homebuilder in mid-December did not materially impact current year results for Trendmaker Homes. TRI Pointe Homes’
net new home orders decreased by 12% on a year over year basis due to a 13% decrease in monthly absorption rate. Demand
remained strong in the markets in which TRI Pointe Homes operates, as evidenced by a monthly absorption rate of 3.4 homes
per community per month at average selling prices above the company average. Despite the overall high demand, market
conditions in California slowed down in the second half of the year after a very strong first half due to similar concerns over
rising mortgage interest rates and affordability. Winchester Homes experienced a 6% decrease in net new home orders as a
result of a 13% decrease in monthly absorption rate due to slower demand, slightly offset by a 9% increase in average selling
communities.
Backlog Units, Backlog Dollar Value and Average Sales Price by Segment (dollars in thousands)
As of December 31, 2018
As of December 31, 2017
Percentage Change
Backlog
Units
Backlog
Dollar
Value
Average
Sales
Price
Backlog
Units
Backlog
Dollar
Value
Average
Sales
Price
Backlog
Units
Backlog
Dollar
Value
Average
Sales
Price
Maracay
Pardee Homes
Quadrant Homes
Trendmaker Homes
TRI Pointe Homes
Winchester Homes
151
402
46
313
318
105
$ 91,532
$
309,453
47,777
159,483
217,767
71,331
Total
1,335
$897,343
$
606
770
1,039
510
685
679
672
217
409
144
173
477
151
$
106,061
$
299,083
107,714
93,974
331,562
94,381
1,571
$ 1,032,775
$
489
731
748
543
695
625
657
(30)%
(2)%
(68)%
81 %
(33)%
(30)%
(15)%
(14)%
3 %
(56)%
70 %
(34)%
(24)%
(13)%
24 %
5 %
39 %
(6)%
(1)%
9 %
2 %
Backlog units reflect the number of homes, net of actual cancellations experienced during the period, for which we have
entered into a sales contract with a homebuyer but for which we have not yet delivered the home. Homes in backlog are
generally delivered within three to nine months from the time the sales contract is entered into, although we may experience
cancellations of sales contracts prior to delivery. Our cancellation rate of homebuyers who contracted to buy a home but did not
close escrow (as a percentage of overall orders) was 18% and 15% for the years ended December 31, 2018 and 2017,
respectively. The dollar value of backlog was approximately $897.3 million as of December 31, 2018, a decrease of $135.4
million, or 13%, compared to $1.0 billion as of December 31, 2017. This decrease was due to a decrease in backlog units of
236, or 15%, to 1,335 as of December 31, 2018, compared to 1,571 as of December 31, 2017, offset by a 2% increase in the
average sales price of homes in backlog to $672,000 as of December 31, 2018, compared to $657,000 as of December 31,
2017.
- 47 -
Maracay's backlog dollar value decreased 14% compared to the prior year as a result of a 30% decrease in backlog units
partly offset by a 24% increase in average sales price. The decrease in backlog units was primarily related to the 21% decrease
in net new home orders, while the increase in average sales price was due to a product mix shift that included a greater
proportion of move-up and luxury product compared to the prior year. Pardee Homes' backlog dollar value increased slightly
by 3% due to a 5% increase in average sales price, offset by a 2% decrease in backlog units. Quadrant Homes’ backlog dollar
value decreased 56% as a result of a 68% decrease in backlog units offset by a 39% increase in average sales price. The
decrease in backlog units was related to the 34% decrease in net new home orders. The increase in average sales price related
to a higher mix of move up and luxury homes from core Seattle markets of King and Snohomish counties which have higher
price points. Trendmaker Homes' backlog dollar value increased 70% due to an 81% increase in backlog units. The increase in
backlog units was due to the acquisition of a Dallas homebuilder in the fourth quarter of 2018 that had 135 homes in backlog as
of December 31, 2018, in addition to the 16% increase in net new home orders resulting from an increase in buyer demand in
both Houston and Austin. TRI Pointe Homes’ backlog dollar value decreased 34% due to a 33% decrease in backlog units.
The decrease in backlog units was primarily due to the slower market conditions experienced in California during the second
half of 2018 resulting in a 12% decrease in net new home orders. Winchester Homes’ backlog dollar value decreased 24% due
to a 30% decrease in backlog units. The decrease in backlog units was due to the timing of deliveries compared to 2017 along
with the 6% decrease in net new home orders in 2018.
New Homes Delivered, Homes Sales Revenue and Average Sales Price by Segment (dollars in thousands)
Year Ended December 31, 2018
Year Ended December 31, 2017
Percentage Change
New
Homes
Delivered
Home
Sales
Revenue
Average
Sales
Price
New
Homes
Delivered
Home
Sales
Revenue
Average
Sales
Price
New
Homes
Delivered
Home
Sales
Revenue
Average
Sales
Price
538
$ 263,321
$ 489
628
$
296,768
$
Maracay
Pardee Homes
Quadrant Homes
Trendmaker Homes
1,582
359
610
999,710
305,213
306,311
TRI Pointe Homes
1,470
1,073,592
Winchester Homes
512
295,940
632
850
502
730
578
1,431
352
506
1,313
467
756,433
245,507
250,033
927,247
256,311
Total
5,071
$3,244,087
$ 640
4,697
$ 2,732,299
$
473
529
697
494
706
549
582
(14)%
(11)%
11 %
2 %
21 %
12 %
10 %
8 %
32 %
24 %
23 %
16 %
15 %
19 %
3%
19%
22%
2%
3%
5%
10%
Home sales revenue increased $511.8 million, or 19% to $3.2 billion for the year ended December 31, 2018. The
increase was comprised of: (i) $294.2 million due to a 10% increase in the average sales price of homes delivered to $640,000
for the year ended December 31, 2018 from $582,000 in the prior year, and (ii) $217.6 million related to an 8% increase in
homes delivered to 5,071 for the year ended December 31, 2018 compared to 4,697 in the prior year.
Maracay reported an 11% decrease in home sales revenue due to a 14% decrease in new homes delivered, slightly offset
by a 3% increase in average sales price. The decrease in new homes delivered was a result of the 21% decrease in net new
home orders in 2018 due to lower average communities compared to the prior year. Pardee Homes increased home sales
revenue by 32% due to a 19% increase in average sales price and an 11% increase in new homes delivered. The increase in
average sales price was due to a product mix shift that included a greater proportion of deliveries from our higher priced long-
dated California assets. In addition, our average sales price increased 20% in Las Vegas due to a higher mix of move up and
luxury deliveries in 2018. Quadrant Homes increased home sales revenue by 24% driven primarily by an increase in average
sales price. The 22% increase in average sales price was the result of delivering more luxury units in the core Seattle markets
of King and Snohomish counties which have higher price points. Home sales revenue increased 23% at Trendmaker Homes
due to a 21% increase in new homes delivered. The increase in new homes delivered was a result of the higher backlog to start
the year and a 16% order growth during the year. Due to the timing of our acquisition of a Dallas based homebuilder in mid-
December, the acquisition did not materially impact current year results. TRI Pointe Homes reported a 16% increase in home
sales revenue as a result of a 12% increase in new homes delivered and a 3% increase in average sales price. The increase in
new homes delivered was driven by a larger opening balance of backlog entering the current year compared to 2017. Home
sales revenue increased at Winchester Homes by 15% largely due to a 10% increase in new homes delivered as a result of a
greater number of backlog units to start the year compared to the prior-year period and a 5% increase in average sales price due
to product mix.
- 48 -
Homebuilding Gross Margins (dollars in thousands)
Home sales revenue
Cost of home sales
Homebuilding gross margin
Add: interest in cost of home sales
Add: impairments and lot option abandonments
Adjusted homebuilding gross margin(1)
Homebuilding gross margin percentage
Adjusted homebuilding gross margin percentage(1)
______________________________________
(1) Non-GAAP financial measure (as discussed below).
2018
$3,244,087
2,536,899
707,188
83,161
5,010
$ 795,359
Year Ended December 31,
2017
%
100.0% $2,732,299
78.2% 2,173,251
559,048
21.8%
64,835
2.6%
0.2%
2,020
24.5% $ 625,903
21.8%
24.5%
20.5%
22.9%
%
100.0%
79.5%
20.5%
2.4%
0.1%
22.9%
Our homebuilding gross margin percentage increased to 21.8% for the year ended December 31, 2018, as compared to
20.5% for the year ended December 31, 2017. The increase in gross margin percentage was due to the mix of deliveries, with a
greater proportion of deliveries from our long-dated California communities, which produce gross margins above the Company
average. In addition, gross margin percentage increased due to the accounting changes resulting from the adoption of ASC 606
on January 1, 2018. For further details on ASC 606, see Note 1, Organization and Summary of Significant Accounting
Policies of the notes to our consolidated financial statements included elsewhere in this annual report on Form 10-K.
Excluding interest and impairments and lot option abandonments in cost of home sales, adjusted homebuilding gross margin
percentage was 24.5% for the year ended December 31, 2018 compared to 22.9% for the prior year period.
Adjusted homebuilding gross margin is a non-GAAP financial measure. We believe this information is meaningful as it
isolates the impact that leverage and noncash charges have on homebuilding gross margin and permits investors to make better
comparisons with our competitors, who adjust gross margins in a similar fashion. See the table above reconciling this non-
GAAP financial measure to homebuilding gross margin, the nearest GAAP equivalent.
Land and Lot Gross Margins (dollars in thousands)
Land and lot sales revenue
Cost of land and lot sales
Land and lot gross margin
2018
8,758
25,435
(16,677)
$
$
Year Ended December 31,
%
100.0 % $
290.4 %
(190.4)% $
2017
74,269
14,888
59,381
%
100.0%
20.0%
80.0%
Our land and lot negative gross margin percentage for the year ended December 31, 2018 was impacted by a $17.5
million settlement payment in connection with the settlement of the Scripps lawsuit, which is described in more detail in Item 3
of this annual report on Form 10-K. During the year ended December 31, 2017, Pardee Homes sold a parcel consisting of 69
homebuilding lots, located in the Pacific Highlands Ranch community in San Diego, California, representing $66.8 million in
land and lot sales revenue and $56.1 million in land and lot gross margin. This sale resulted in significant gross margin due to
the low land basis of the Pacific Highlands Ranch community, which was acquired in 1981.
Land and lot sales gross margin percentage can vary significantly due to the type of land and its related cost basis.
Additionally, we expect land and lot sales revenue to vary significantly between reporting periods based on our business
decisions to maintain or decrease our land ownership in various markets. Our land and lot sale decisions will be based on a
variety of factors, including, without limitation, prevailing market conditions.
- 49 -
Sales and Marketing, General and Administrative Expense (dollars in thousands)
Sales and marketing
General and administrative (G&A)
Total sales and marketing and G&A
Year Ended
December 31,
2018
187,267
155,030
342,297
$
$
2017
137,066
137,764
274,830
$
$
As a Percentage of
Home Sales Revenue
2018
2017
5.8%
4.8%
10.6%
5.0%
5.1%
10.1%
Sales and marketing expense as a percentage of home sales revenue increased to 5.8% for the year ended December 31,
2018 from 5.0% for the year ended December 31, 2017. The increase was due primarily to advertising costs impacted by the
timing of future community openings. This was offset by the higher operating leverage on the fixed components of sales and
marketing expenses as a result of the 19% increase in homes sales revenue. Sales and marketing expense increased to $187.3
million compared to $137.1 million in the prior-year period due to higher advertising costs and the variable cost associated with
higher home sales revenue, in addition to the accounting changes resulting from the adoption of ASC 606 on January 1, 2018.
For further details on ASC 606, see Note 1, Organization and Summary of Significant Accounting Policies of the notes to our
consolidated financial statements included elsewhere in this annual report on Form 10-K.
General and administrative expense as a percentage of home sales revenue decreased to 4.8% for the year ended
December 31, 2018 from 5.1% in the prior year. The decrease was primarily the result of higher operating leverage as a result
of the 19% increase in homes sales revenue during the year. General and administrative expense increased by $17.3 million to
$155.0 million for the year ended December 31, 2018 from $137.8 million for the prior year ended December 31, 2017. The
increase in general and administrative expenses is primarily related to incremental costs associated with the additional
headcount to support future growth in our newer markets of Los Angeles and Sacramento, California, Austin and Dallas–Fort
Worth, Texas and our new division in the Carolinas.
Total sales and marketing and G&A (“SG&A”) expense increased $67.5 million, or 25%, to $342.3 million for the year
ended December 31, 2018 from $274.8 million in the prior year period. SG&A increased to 10.6% of home sales revenue from
10.1% for the years ended December 31, 2018 and 2017, respectively.
Interest
Interest, which was incurred principally to finance land acquisitions, land development and home construction, totaled
$91.6 million and $84.3 million for the years ended December 31, 2018 and 2017, respectively. All interest incurred in both
periods was capitalized. The increase in interest incurred during the year ended December 31, 2018 as compared to the prior
year was primarily attributable to an increase in our debt balance and weighted average interest rate, as a result of the issuance
of our $300.0 million aggregate principal amount of 5.250% Senior Notes due 2027 (the “2027 Notes”) in June 2017.
Income Tax
For the year ended December 31, 2018, we have recorded a tax provision of $90.6 million based on an effective tax rate
of 25.0%. For the year ended December 31, 2017, we recorded a tax provision of $152.3 million based on an effective tax rate
of 44.8%. The decrease in the current year income tax rate was due to the lower Federal tax rate resulting from the Tax Cuts
and Jobs Act that was signed into law in December 2017. In addition to the lower rate resulting from this legislation, we
recorded a prior year charge of $22.0 million as a result of the re-measurement of our deferred tax assets.
Financial Services Segment
Income from our financial services operations increased to $9.7 million for the year ended December 31, 2018 compared
to income of $7.5 million in the prior year. The increase in financial services income for the year ended December 31, 2018
compared to the prior year primarily relates to the growth of our mortgage financing and title services operations. Both our
mortgage financing and title service operations were started in late 2014 and have experienced steady year over year growth
from inception. In early 2018, we further expanded our suite of financial services operations to include homeowners insurance
services.
- 50 -
Investments in Unconsolidated Entities
Total equity in income (loss) from unconsolidated entities was $8.1 million for the year ended December 31, 2018
compared to a loss of $5.0 million for the year ended December 31, 2017. Included in total equity in income (loss) from
unconsolidated entities is activity from our Financial Services segment of $8.5 million and $6.4 million for the years ended
December 31, 2018 and 2017, respectively. The change in income for the current year compared to the loss in the prior year is
primarily driven by a $13.2 million impairment charge during the fourth quarter of 2017 related to a joint venture formed as a
limited liability company in 1999 for the entitlement and development of land located in Los Angeles County, California. This
impairment charge in 2017 is included in equity in (loss) income of unconsolidated entities under our homebuilding operations
on the consolidated statements of operations.
Lots Owned or Controlled by Segment
Excluded from lots owned or controlled are those related to Note 6, Investments in Unconsolidated Entities, of the notes
to our consolidated financial statements included elsewhere in this annual report on Form 10-K. The table below summarizes
our lots owned or controlled by segment as of the dates presented:
Lots Owned
Maracay
Pardee Homes
Quadrant Homes
Trendmaker Homes
TRI Pointe Homes
Winchester Homes
Total
Lots Controlled(1)
Maracay
Pardee Homes
Quadrant Homes
Trendmaker Homes
TRI Pointe Homes
Winchester Homes
Total
Total Lots Owned or Controlled(1)
______________________________________________
December 31,
Increase
(Decrease)
2018
2017
Amount
%
2,346
13,700
883
1,661
3,150
1,317
23,057
962
676
861
831
945
408
4,683
27,740
1,950
14,925
1,070
1,508
2,890
1,597
23,940
569
219
656
347
1,074
507
3,372
27,312
396
(1,225)
(187)
153
260
(280)
(883)
393
457
205
484
(129)
(99)
1,311
428
20 %
(8)%
(17)%
10 %
9 %
(18)%
(4)%
69 %
209 %
31 %
139 %
(12)%
(20)%
39 %
2 %
(1) As of December 31, 2018 and 2017, lots controlled included lots that were under land option contracts or purchase
contracts.
- 51 -
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Net New Home Orders, Average Selling Communities and Monthly Absorption Rates by Segment
Year Ended December 31, 2017
Year Ended December 31, 2016
Percentage Change
Net New
Home
Orders
597
1,580
395
516
1,492
495
5,075
Average
Selling
Communities
14.8
29.9
7.5
30.4
32.0
12.9
127.5
Monthly
Absorption
Rates
3.4
4.4
4.4
1.4
3.9
3.2
3.3
Net New
Home
Orders
670
1,206
341
501
1,097
433
4,248
Average
Selling
Communities
18.0
23.6
8.0
27.8
27.6
13.3
118.3
Monthly
Absorption
Rates
3.1
4.3
3.6
1.5
3.3
2.7
3.0
Net New
Home
Orders
(11)%
31 %
16 %
3 %
36 %
14 %
19 %
Average
Selling
Communities
(18)%
27 %
(6)%
9 %
16 %
(3)%
8 %
Monthly
Absorption
Rates
10 %
2 %
22 %
(7)%
18 %
19 %
10 %
Maracay
Pardee Homes
Quadrant Homes
Trendmaker Homes
TRI Pointe Homes
Winchester Homes
Total
Net new home orders for the year ended December 31, 2017 increased 19% to 5,075, compared to 4,248 for the prior
year. The increase in net new home orders was due to an overall 10% increase in monthly absorption rates and an 8% increase
in average selling communities. Overall, the markets in which we operate continued to have strong demand, which is
demonstrated by increased absorption rates in all but one of our reportable segments for the year ended December 31, 2017.
Maracay reported an 11% decrease in net new home orders driven by an 18% decrease in average selling communities
offset by a 10% increase in monthly absorption rate. The increase in monthly absorption rate was the result of strong market
fundamentals in our Arizona markets and successful new product offerings during the year. The decrease in average selling
communities was due to the timing of community openings and closings compared to the prior year. Pardee Homes increased
net new home orders by 31% mainly due to a 27% increase in average selling communities along with a 2% increase in
monthly absorption rate. Demand remained strong in all of the markets in which Pardee Homes operated. Net new home
orders increased by 16% at Quadrant Homes largely due to the 22% increase in monthly absorption rate. The increase in
monthly absorption rate was the result of our well-located communities and continued strong market fundamentals.
Trendmaker Homes increased net new home orders by 3% due to a 9% increase in average selling communities offset by a 7%
decrease in monthly absorption rate, partly due to the loss of two weeks of selling due to the impact of Hurricane Harvey. The
Houston market continued to experience softer market conditions due to the volatility in oil prices in recent years and the
related impact on job growth. TRI Pointe Homes’ net new home orders increased by 36% on a year over year basis due to an
18% increase in monthly absorption rate and a 16% increase in average selling communities. Demand remained strong in the
markets in which TRI Pointe Homes operated, as evidenced by absorptions of 3.9 homes per community, per month, at average
selling prices above the company average. Winchester Homes experienced a 14% growth in net new home orders as a result of
a 19% increase in monthly absorption rate offset by a slight decrease in average selling communities. The increase in monthly
absorption rate was due to strong customer demand in some of our larger master plan communities.
Backlog Units, Backlog Dollar Value and Average Sales Price by Segment (dollars in thousands)
As of December 31, 2017
As of December 31, 2016
Percentage Change
Backlog
Units
Backlog
Dollar
Value
Average
Sales
Price
Backlog
Units
Backlog
Dollar
Value
Average
Sales
Price
Backlog
Units
Backlog
Dollar
Value
Average
Sales
Price
Maracay
Pardee Homes
Quadrant Homes
Trendmaker Homes
TRI Pointe Homes
Winchester Homes
217
409
144
173
477
151
Total
1,571
$ 106,061
$
299,083
107,714
93,974
331,562
94,381
$ 1,032,77
5
$
489
731
748
543
695
625
657
248
260
101
163
298
123
$ 114,203
$
134,128
68,461
85,579
180,012
78,763
1,193
$ 661,146
$
460
516
678
525
604
640
554
(13)%
57 %
43 %
6 %
60 %
23 %
32 %
(7)%
123 %
57 %
10 %
84 %
20 %
56 %
6 %
42 %
10 %
3 %
15 %
(2)%
19 %
Backlog units reflect the number of homes, net of actual cancellations experienced during the period, for which we have
entered into a sales contract with a homebuyer but for which we have not yet delivered the home. Homes in backlog are
- 52 -
generally delivered within three to nine months from the time the sales contract is entered into, although we may experience
cancellations of sales contracts prior to delivery. Our cancellation rate of homebuyers who contracted to buy a home but did not
close escrow (as a percentage of overall orders) remained consistent at 15% for both years ended December 31, 2017 and 2016.
The dollar value of backlog was approximately $1.0 billion as of December 31, 2017, an increase of $371.6 million, or 56%,
compared to $661.1 million as of December 31, 2016. This increase was due to an increase in backlog units of 378, or 32%, to
1,571 as of December 31, 2017, compared to 1,193 as of December 31, 2016, and a 19% increase in the average sales price of
homes in backlog to $657,000 as of December 31, 2017, compared to $554,000 as of December 31, 2016.
Maracay's backlog dollar value decreased 7% compared to the prior year as a result of a 13% decrease in backlog units
partly offset by a 6% increase in average sales price. The decrease in backlog units was related to the decrease in average
selling communities, while the increase in average sales price was due to a product mix shift that included a greater proportion
of move-up and luxury product compared to the prior year. Pardee Homes' backlog dollar value increased 123% due to a 57%
increase in backlog units and a 42% increase in average sales price. The increase in backlog units was due to the 31% increase
in orders during the year while the increase in average selling price was due to increased pricing power in our markets and a
higher end product mix with higher price points. Quadrant Homes’ backlog dollar value increased 57% as a result of a 43%
increase in backlog units and a 10% increase in average sales price. The increase in backlog units was directly related to the
increase in net new home orders during the year as result of a 22% increase in monthly absorption rate. The increase in average
sales prices was related to a higher mix of homes in backlog from core Seattle markets of King and Snohomish counties which
have higher price points. Trendmaker Homes' backlog dollar value increased 10% largely due to a 6% increase in backlog
units. The increase in backlog units was related to the increase in net new home orders resulting from an increase in average
selling communities. TRI Pointe Homes’ backlog dollar value increased 84% due to a 60% increase in backlog units and 15%
increase in average sales price. The increase in backlog units was primarily due to the strong monthly absorption rate in 2017,
particularly impacted by a 40% increase in the fourth quarter of 2017 compared to the fourth quarter of 2016. Winchester
Homes’ backlog dollar value increased 20% due primarily to a 23% increase in backlog units. The increase in backlog units
was due to the 14% increase in net new home orders in 2017 compared to the prior year.
New Homes Delivered, Homes Sales Revenue and Average Sales Price by Segment (dollars in thousands)
Year Ended December 31, 2017
Year Ended December 31, 2016
Percentage Change
New
Homes
Delivered
Home
Sales
Revenue
Average
Sales
Price
New
Homes
Delivered
Home
Sales
Revenue
Average
Sales
Price
New
Homes
Delivered
Home
Sales
Revenue
Average
Sales
Price
Maracay
Pardee Homes
Quadrant Homes
Trendmaker Homes
TRI Pointe Homes
Winchester Homes
628
$
296,768
$ 473
625
$
255,253
$ 408
1,431
352
506
1,313
467
756,433
245,507
250,033
927,247
256,311
529
697
494
706
549
1,220
383
474
1,089
420
668,835
207,057
239,734
723,186
235,271
548
541
506
664
560
Total
4,697
$ 2,732,299
$ 582
4,211
$ 2,329,336
$ 553
— %
17 %
(8)%
7 %
21 %
11 %
12 %
16%
13%
19%
4%
28%
9%
17%
16 %
(3)%
29 %
(2)%
6 %
(2)%
5 %
Home sales revenue increased $403.0 million, or 17% to $2.7 billion for the year ended December 31, 2017. The
increase was comprised of: (i) $268.8 million due to an increase in homes delivered to 4,697 for the year ended December 31,
2017 from 4,211 in the prior year, and (ii) $134.2 million related to a $29,000 or 5% increase in the average sales price of
homes delivered to $582,000 for the year ended December 31, 2017 from $553,000 in the prior year.
Maracay reported a 16% increase in home sales revenue due to a 16% increase in average sales price. The increase in
average sales price was driven by a product mix shift that included a greater proportion of move-up and luxury product
compared to the prior year. Pardee Homes increased home sales revenue by 13% due to a 17% increase in new homes
delivered offset by a slight decrease in average sales price. The increase in new home deliveries at Pardee Homes was the
result of an increase in net new home orders due to strong market demand. Quadrant Homes increased home sales revenue by
19% driven by an increase in average sales price, offset by a decrease in new home deliveries. The 29% increase in average
sales price was the result of delivering more units in the core Seattle markets of King and Snohomish counties which have
higher price points. Home sales revenue increased 4% at Trendmaker Homes due to a 7% increase in new homes delivered.
The increase in new homes delivered was a result of the higher backlog to start the year and a 3% order growth during the year.
It should be noted that Hurricane Harvey, which caused significant flooding and widespread damage in Houston, was
responsible for delivery delays during 2017 at Trendmaker Homes. Approximately 30 deliveries that would have occurred in
2017 instead delivered in early 2018 at Trendmaker Homes. TRI Pointe Homes reported a 28% increase in home sales revenue
- 53 -
as a result of a 21% increase in new homes delivered and a 6% increase in average sales price. The increase in new homes
delivered was driven by the 36% increase in net new home orders during the year. Home sales revenue increased at Winchester
Homes by 9% due to an increase in new homes delivered as a result of the 14% increase in net new home orders during the
year.
Homebuilding Gross Margins (dollars in thousands)
Home sales revenue
Cost of home sales
Homebuilding gross margin
Add: interest in cost of home sales
Add: impairments and lot option abandonments
Adjusted homebuilding gross margin(1)
Homebuilding gross margin percentage
Adjusted homebuilding gross margin percentage(1)
_______________________________________________
(1) Non-GAAP financial measure (as discussed below).
2017
$2,732,299
2,173,251
559,048
64,835
2,020
$ 625,903
Year Ended December 31,
2016
%
100.0% $2,329,336
79.5% 1,836,327
493,009
20.5%
51,111
2.4%
0.1%
1,470
22.9% $ 545,590
20.5%
22.9%
21.2%
23.4%
%
100.0%
78.8%
21.2%
2.2%
0.1%
23.4%
Our homebuilding gross margin percentage decreased to 20.5% for the year ended December 31, 2017, as compared to
21.2% for the year ended December 31, 2016. The decrease in gross margin percentage was primarily due to the mix of homes
delivered and increased labor and materials cost. Excluding interest and impairments and lot option abandonments in cost of
home sales, adjusted homebuilding gross margin percentage was 22.9% for the year ended December 31, 2017 compared to
23.4% for the prior year period.
Adjusted homebuilding gross margin is a non-GAAP financial measure. We believe this information is meaningful as it
isolates the impact that leverage and noncash charges have on homebuilding gross margin and permits investors to make better
comparisons with our competitors, who adjust gross margins in a similar fashion. See the table above reconciling this non-
GAAP financial measure to homebuilding gross margin, the nearest GAAP equivalent.
Land and Lot Gross Margins (dollars in thousands)
Land and lot sales revenue
Cost of land and lot sales
Land and lot gross margin
2017
74,269
14,888
59,381
$
$
Year Ended December 31,
%
100.0% $
20.0%
80.0% $
2016
72,272
17,367
54,905
%
100.0%
24.0%
76.0%
Our land and lot gross margin percentage increased to 80.0% for the year ended December 31, 2017 as compared to
76.0% for the prior year period, in part, owing to the following.
During the year ended December 31, 2017, Pardee Homes sold a parcel consisting of 69 homebuilding lots, located in
the Pacific Highlands Ranch community in San Diego, California, representing $66.8 million in land and lot sales revenue and
$56.1 million in land and lot gross margin. During the year ended December 31, 2016, Pardee Homes sold two parcels, totaling
102 homebuilding lots, located in the Pacific Highlands Ranch community. Pardee Homes received $61.6 million in cash
proceeds from the related sales in 2016. These sales resulted in significant gross margin due to the low land basis of the Pacific
Highlands Ranch community, which was acquired in 1981.
Land and lot sales gross margin percentage can vary significantly due to the type of land and its related cost basis.
Additionally, we expect land and lot sales revenue to vary significantly between reporting periods based on our business
decisions to maintain or decrease our land ownership in various markets. Our land and lot sale decisions will be based on a
variety of factors, including, without limitation, prevailing market conditions.
- 54 -
Sales and Marketing, General and Administrative Expense (dollars in thousands)
Sales and marketing
General and administrative (G&A)
Total sales and marketing and G&A
Year Ended
December 31,
2017
137,066
137,764
274,830
$
$
2016
127,903
124,119
252,022
$
$
As a Percentage of
Home Sales Revenue
2017
2016
5.0%
5.1%
10.1%
5.5%
5.3%
10.8%
Sales and marketing expense as a percentage of home sales revenue decreased to 5.0% for the year ended December 31,
2017 from 5.5% for the year ended December 31, 2016. The decrease was primarily the result of higher operating leverage on
the fixed components of sales and marketing expenses as a result of the 17% increase in homes sales revenue. Sales and
marketing expense increased $9.2 million, or 7%, to $137.1 million for the year ended December 31, 2017 from $127.9 million
for the prior year period. The increase was due primarily to the additional selling expenses and commissions associated with the
17% increase in home sales revenue during the year.
General and administrative expense as a percentage of home sales revenue decreased to 5.1% for the year ended
December 31, 2017 from 5.3% in the prior year. The decrease was primarily the result of higher operating leverage as a result
of the 17% increase in homes sales revenue during the year. General and administrative expense increased by $13.6 million to
$137.8 million for the year ended December 31, 2017 from $124.1 million for the prior year ended December 31, 2016. The
increase in general and administrative expenses is primarily related to incremental costs associated with the additional
headcount to support future growth, along with our continued expansion into Austin, Texas and Los Angeles, California and the
recently announced expansion into the Sacramento, California market.
Total sales and marketing and G&A (“SG&A”) expense increased $22.8 million, or 9%, to $274.8 million for the year
ended December 31, 2017 from $252.0 million in the prior year period. SG&A decreased to 10.1% of home sales revenue from
10.8% for the years ended December 31, 2017 and 2016, respectively.
Interest
Interest, which was incurred principally to finance land acquisitions, land development and home construction, totaled
$84.3 million and $68.3 million for the years ended December 31, 2017 and 2016, respectively. All interest incurred in both
periods was capitalized. The increase in interest incurred during the year ended December 31, 2017 as compared to the prior
year was primarily attributable to an increase in our debt balance and weighted average interest rate, as a result of the issuance
of our $300.0 million aggregate principal amount of 4.875% Senior Notes due 2021 (the “2021 Notes”) in May 2016 and our
$300.0 million aggregate principal amount of 5.250% Senior Notes due 2027 (the “2027 Notes”) in June 2017.
Income Tax
For the year ended December 31, 2017, we have recorded a tax provision of $152.3 million based on an effective tax rate
of 44.8%. For the year ended December 31, 2016, we recorded a tax provision of $106.1 million based on an effective tax rate
of 35.1%. The increase in the income tax rate over the prior year was largely due to a charge of $22.0 million as a result of the
re-measurement of our deferred tax assets related to the Tax Cuts and Jobs Act that was signed into law in December 2017. In
addition, our tax rate increased compared to the prior year due to the negative impact from the expiration of non-qualified stock
options.
Financial Services Segment
Income from our financial services operations increased to $7.5 million for the year ended December 31, 2017 compared
to income of $5.8 million in the prior year. The increase in financial services income for the year ended December 31, 2017
compared to the prior year primarily relates to the growth of our mortgage financing and title services operations. Both our
mortgage financing and title service operations were started in late 2014 and have experienced steady year over year growth
from inception.
- 55 -
Investments in Unconsolidated Entities
Total equity in income (loss) from unconsolidated entities was a loss of $5.0 million for the year ended December 31,
2017 compared to income of $5.0 million for the year ended December 31, 2016. The $10.0 million decrease from income in
the prior year to a loss in the current year was primarily driven by a $13.2 million impairment charge during the fourth quarter
of 2017 related to a joint venture formed as a limited liability company in 1999 for the entitlement and development of land
located in Los Angeles County, California. This impairment charge is included in equity in income (loss) of unconsolidated
entities under our homebuilding operations on the consolidated statements of operations. Although we continue to hold a 5%
equity stake in the joint venture, we are a non-funding member of the limited liability company and we expect our equity stake
to be further diluted.
Lots Owned or Controlled by Segment
Excluded from lots owned or controlled are those related to Note 6, Investments in Unconsolidated Entities, of the notes
to our consolidated financial statements included elsewhere in this annual report on Form 10-K. The table below summarizes
our lots owned or controlled by segment as of the dates presented:
Lots Owned
Maracay
Pardee Homes
Quadrant Homes
Trendmaker Homes
TRI Pointe Homes
Winchester Homes
Total
Lots Controlled(1)
Maracay
Pardee Homes
Quadrant Homes
Trendmaker Homes
TRI Pointe Homes
Winchester Homes
Total
Total Lots Owned or Controlled(1)
_________________________________________________
December 31,
Increase
(Decrease)
2017
2016
Amount
%
1,950
14,925
1,070
1,508
2,890
1,597
23,940
569
219
656
347
1,074
507
3,372
27,312
1,667
16,041
1,027
1,687
3,073
1,788
25,283
386
871
555
312
406
496
3,026
28,309
283
(1,116)
43
(179)
(183)
(191)
(1,343)
183
(652)
101
35
668
11
346
(997)
17 %
(7)%
4 %
(11)%
(6)%
(11)%
(5)%
47 %
(75)%
18 %
11 %
165 %
2 %
11 %
(4)%
(1) As of December 31, 2017 and 2016, lots controlled included lots that were under land option contracts or purchase
contracts.
Liquidity and Capital Resources
Overview
Our principal uses of capital for the year ended December 31, 2018 were operating expenses, share repurchases, debt
repayments, land purchases, a business acquisition, land development and home construction. We used funds generated by our
operations and available borrowings under the Credit Facility to meet our short-term working capital requirements. We remain
focused on generating positive margins in our homebuilding operations and acquiring desirable land positions in order to
maintain a strong balance sheet and keep us poised for growth. As of December 31, 2018, we had $277.7 million of cash and
cash equivalents. We believe that we have sufficient cash and sources of financing for at least the next twelve months.
- 56 -
Our board of directors will consider a number of factors when evaluating our level of indebtedness and when making
decisions regarding the incurrence of new indebtedness, including the purchase price of assets to be acquired with debt
financing, the estimated market value of our assets and the ability of particular assets, and our company as a whole, to generate
cash flow to cover the expected debt service.
Senior Notes
In June 2017, TRI Pointe Group issued $300.0 million aggregate principal amount of 5.250% Senior Notes due 2027
(the “2027 Notes”) at 100.00% of their aggregate principal amount. Net proceeds of this issuance were $296.3 million, after
debt issuance costs and discounts. The 2027 Notes mature on June 1, 2027 and interest is paid semiannually in arrears on June
1 and December 1 of each year until maturity, beginning on December 1, 2017.
In May 2016, TRI Pointe Group issued $300.0 million aggregate principal amount of 4.875% Senior Notes due 2021
(the “2021 Notes”) at 99.44% of their aggregate principal amount. Net proceeds of this issuance were $293.9 million, after
debt issuance costs and discounts. The 2021 Notes mature on July 1, 2021 and interest is paid semiannually in arrears on
January 1 and July 1.
TRI Pointe Group and its 100% owned subsidiary TRI Pointe Homes, Inc. ("TRI Pointe Homes") are co-issuers of the
4.375% Senior Notes due 2019 (the "2019 Notes") and the 5.875% Senior Notes due 2024 (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 from the offering were $861.3 million, after debt issuance costs and discounts. 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. During the year ended December 31, 2018, we repurchased and cancelled an aggregate principal
amount of $68.1 million of the 2019 Notes.
As of December 31, 2018, there was $14.6 million of capitalized debt financing costs, included in senior notes, net 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 $11.5 million and $10.6 million as of December 31, 2018 and 2017, respectively.
Unsecured Revolving Credit Facility
On June 20, 2017, we modified the Credit Facility to extend the maturity date by two years to May 18, 2021, while
decreasing the total commitments under the Credit Facility to $600 million from $625 million. In addition, the Credit Facility
was modified to give the Company the option to make offers to the lenders to extend the maturity date of the facility in twelve-
month increments, subject to the satisfaction of certain conditions. The Credit Facility contains a sublimit of $75.0 million for
letters of credit. We may borrow under the Credit Facility in the ordinary course of business to fund our operations, including
our land development and homebuilding activities. Borrowings under the Credit Facility will be governed by, among other
things, a borrowing base. The Credit Facility contains customary affirmative and negative covenants, including financial
covenants relating to consolidated tangible net worth, leverage, and liquidity or interest coverage. Interest rates on borrowings
will be based on either a daily Eurocurrency base rate or a Eurocurrency rate, in either case, plus a spread ranging from 1.25%
to 2.00%, depending on the Company’s leverage ratio.
As of December 31, 2018, the outstanding balance under the Credit Facility was zero with $568.2 million of availability
after considering the borrowing base provisions and outstanding letters of credit. At December 31, 2018, we had outstanding
letters of credit of $31.8 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.
- 57 -
Covenant Compliance
Under the Credit Facility, we are required to comply with certain financial covenants, including, but not limited to, those
set forth in the table below (dollars in thousands):
Financial Covenants
Consolidated Tangible Net Worth, as defined
(Not less than $1.1 billion plus 50% of net income and 50% of the net
proceeds from equity offerings after March 31, 2017)
Leverage Test
(Not to exceed 55%)
Interest Coverage Test
(Not less than 1.5:1.0)
Actual at
December 31,
Covenant
Requirement at
December 31,
2018
1,896,497
$
$
2018
1,324,453
38.1%
5.6
As of December 31, 2018, we were in compliance with all of the above financial covenants.
Leverage Ratios
We believe that our leverage ratios provide useful information to the users of our financial statements regarding our
financial position and cash and debt management. The ratio of debt-to-capital and the ratio of net debt-to-net capital are
calculated as follows (dollars in thousands):
Senior Notes
Total debt
Stockholders’ equity
Total capital
Ratio of debt-to-capital(1)
Total debt
Less: Cash and cash equivalents
Net debt
Stockholders’ equity
Net capital
Ratio of net debt-to-net capital(2)
______________________________________________
December 31, 2018
December 31, 2017
$
$
1,410,804
1,410,804
2,056,924
3,467,728
40.7%
1,410,804
(277,696)
1,133,108
2,056,924
$
$
1,471,302
1,471,302
1,929,722
3,401,024
43.3%
1,471,302
(282,914)
1,188,388
1,929,722
$
3,190,032
$
3,118,110
35.5%
38.1%
(1) The ratio of debt-to-capital is computed as the quotient obtained by dividing total debt by the sum of total debt plus
stockholders' equity.
(2) The ratio of net debt-to-net capital is a non-GAAP financial measure and is computed as the quotient obtained by
dividing net debt (which is debt less cash and cash equivalents) by the sum of net debt plus stockholders' equity. The
most directly comparable GAAP financial measure is the ratio of debt-to-capital. We believe the ratio of net debt-to-net
capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an
indicator of our ability to obtain financing. See the table above reconciling this non-GAAP financial measure to the
ratio of debt-to-capital.
Cash Flows—Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
The comparison of cash flows for the years ended December 31, 2018 and 2017 is as follows:
• Net cash provided by operating activities increased by $209.0 million to $310.7 million in 2018 from cash provided
of $101.7 million in 2017. The change was primarily composed of a decrease in cash outflow related to real estate
inventories of $113.5 million in 2018 as we decreased our land acquisition and development spending. Other
activity included (i) an increase in net income to $271.5 million in 2018 compared to $187.6 million in 2017 and (ii)
other offsetting activity including changes in other assets, receivables, accrued expenses and other liabilities and
deferred income taxes.
- 58 -
• Net cash used in investing activities was $95.4 million in 2018 compared to $3.6 million in 2017. The increase in
cash used in 2018 was due primarily to our acquisition of a Dallas based homebuilder and higher purchases of
property and equipment. The large increase in purchases of property and equipment is due to the accounting
changes resulting from the adoption of ASC 606 on January 1, 2018. Most model and sales office costs were
previously recorded to inventory and were presented as an operating cash flow. Subsequent to the adoption of ASC
606 these purchases are recorded as fixed assets and included as investing cash flows. For further details on ASC
606 see Note 1, Organization and Summary of Significant Accounting Policies of the notes to our consolidated
financial statements included elsewhere in this annual report on Form 10-K.
• Net cash used in financing activities increased to $220.5 million in 2018 from cash used of $23.8 million in 2017.
The change was primarily a result of net debt repayments in 2018 of $68.1 million compared to net borrowings of
$80.3 million in 2017. In addition, share repurchase activity increased by $33.8 million in 2018 compared to the
prior year.
As of December 31, 2018, our cash and cash equivalents balance was $277.7 million.
Cash Flows—Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The comparison of cash flows for the years ended December 31, 2017 and 2016 is as follows:
• Net cash provided by operating activities increased by $260.0 million to $101.7 million in 2017 from cash used of
$158.3 million in 2016. The change was primarily composed of a decrease in cash outflow related to real estate
inventories of $182.9 million in 2017 as we decreased our land acquisition and development spending. Other
activity included (i) a decrease in net income to $187.6 million in 2017 compared to $196.1 million in 2016 and (ii)
other offsetting activity including changes in other assets, receivables, accrued expenses and other liabilities and
deferred income taxes.
• Net cash used in investing activities was $3.6 million in 2017 compared to $4.0 million in 2016. The decrease in
2017 was due primarily to decreased purchases of property and equipment.
• Net cash used in financing activities increased to $23.8 million in 2017 from cash provided of $156.5 million in
2016. The change was primarily a result of a net decrease in debt borrowings of $123.9 million in 2017 compared to
2016. In addition, share repurchase activity increased by $70.1 million in 2017 compared to the prior year.
As of December 31, 2017 our cash and cash equivalents balance was $282.9 million.
Off-Balance Sheet Arrangements
In the ordinary course of business, we enter into land option contracts in order to procure lots for the construction of our
homes. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved
lots. These purchase contracts typically require a cash deposit and the purchase of properties under these contracts is generally
contingent upon satisfaction of certain requirements by the sellers, including obtaining applicable property and development
entitlements. We also utilize option contracts with land sellers and land banking arrangements as a method of acquiring land in
staged takedowns, to help us manage the financial and market risk associated with land holdings, and to reduce the use of funds
from our corporate financing sources. These option contracts and land banking arrangements generally require a non-
refundable deposit for the right to acquire lots over a specified period of time at pre-determined prices. We generally have the
right at our discretion to terminate our obligations under both purchase contracts and option contracts by forfeiting our cash
deposit with no further financial responsibility to the land seller. When market conditions are such that land values are not
appreciating, existing option agreements may become less desirable, at which time we may elect to forfeit deposits and pre-
acquisition costs and terminate the agreements. In some cases, however, we may be contractually obligated to complete
development work even if we terminate the option to procure land or lots. As of December 31, 2018, we had $71.9 million of
non-refundable cash deposits pertaining to land option contracts and purchase contracts with an aggregate remaining purchase
price of approximately $741.2 million (net of deposits).
Our utilization of land option contracts and land banking arrangements is dependent on, among other things, the
availability of land sellers or land banking firms willing to enter into option takedown arrangements, the availability of capital
to finance the development of optioned lots, general housing market conditions, and local market dynamics. Options may be
more difficult to procure from land sellers in strong housing markets and are more prevalent in certain geographic regions.
As of December 31, 2018, we had $568.2 million of availability under the Credit Facility after considering the
borrowing base provisions and outstanding letters of credit.
- 59 -
Contractual Obligations Table
The following table summarizes our future estimated cash payments under existing contractual obligations as of
December 31, 2018, including estimated cash payments due by period. Our purchase obligations represent commitments for
land purchases under land purchase and land option contracts with non-refundable deposits.
Contractual Obligations
Long-term debt principal payments(1)
Long-term debt interest payments
Operating leases(2)
Ground leases(3)
Purchase obligations(4)
Total
__________________________________________
Payments Due by Period
Total
Less Than 1
Year
1-3 Years
4-5 Years
After 5 Years
(in thousands)
$ 1,431,895
$ 381,895
$ 300,000
$
— $
750,000
330,956
39,541
99,893
65,673
113,666
84,375
7,502
2,902
14,659
5,805
9,286
5,805
741,218
501,130
229,695
10,393
67,242
8,094
85,381
—
$ 2,643,503
$ 959,102
$ 663,825
$ 109,859
$
910,717
(1) For a more detailed description of our long-term debt, please see Note 11, Senior Notes and Unsecured Revolving
Credit Facility, of the notes to our consolidated financial statements included elsewhere in this annual report on
Form 10-K.
Includes leases relating to office space, buildings and equipment. For a more detailed description of our operating
leases, please see Note 13, Commitments and Contingencies, of the notes to our consolidated financial statements
included elsewhere in this annual report on Form 10-K.
(2)
(3) Ground lease obligations have been fully subleased through 2041. Our lease commitment net of sublease income was
$33.1 million as of December 31, 2018. For a more detailed description of our ground leases, please see Note 13,
Commitments and Contingencies, of the notes to our consolidated financial statements included elsewhere in this
annual report on Form 10-K.
Includes $741.2 million (net of deposits) of the remaining purchase price for all land options contracts and purchase
contracts as of December 31, 2018. For a more detailed description of our land purchase and option contracts, please
see the discussion set forth above in the section entitled “—Off-Balance Sheet Arrangements.”
(4)
Inflation
Our homebuilding operations can be adversely impacted by inflation, primarily from higher land, financing, labor,
material and construction costs. In addition, inflation can lead to higher mortgage rates, which can significantly affect the
affordability of mortgage financing to homebuyers. While we attempt to pass on cost increases to homebuyers through
increased prices, when weak housing market conditions exist, we are often unable to offset cost increases with higher selling
prices.
Seasonality
Historically, the homebuilding industry experiences seasonal fluctuations in quarterly operating results and capital
requirements. We typically experience the highest new home order activity during the first and second quarters of our fiscal
year, although this activity is also highly dependent on the number of active selling communities, timing of new community
openings and other market factors. Since it typically takes four to six months to construct a new home, the number of homes
delivered and associated home sales revenue typically increases in the third and fourth quarters of our fiscal year as new home
orders sold earlier in the year convert to home deliveries. Due to this seasonality, home starts, construction costs and related
cash outflows have historically been highest in the second and third quarters of our fiscal year, and the majority of cash receipts
from home deliveries occur during the second half of the year. We expect this seasonal pattern to continue over the long-term,
although it may be affected by volatility in the homebuilding industry.
Critical Accounting Policies
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,
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our management evaluates its estimates and judgments, including those which impact our most critical accounting policies. 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 under different assumptions or conditions.
Our management believes that the following accounting policies are among the most important to the portrayal of our financial
condition and results of operations and require among the most difficult, subjective or complex judgments:
Revenue Recognition
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers
(Codified as “ASC 606”). ASC 606 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 eliminates certain
cost guidance related to construction-type and production-type contracts in accordance with ASC 970. In addition, ASC 606
includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which provided updated guidance
related to certain costs incurred in obtaining and fulfilling contracts with customers. Collectively, we refer to ASC 606 and
Subtopic 340-40 as ASC 606 throughout this filing. The core principle of ASC 606 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. We have adopted and applied this updated revenue recognition and cost policy
as of January 1, 2018. For further details on ASC 606, see Note 1, Organization and Summary of Significant Accounting
Policies, of the notes to our consolidated financial statements included elsewhere in this annual report on Form 10-K.
The majority of our revenue is related to fixed-price contracts to deliver completed homes to homebuyers, and to a much
lesser degree, to deliver land or lots to other homebuilders or real estate developers. We generally deliver completed homes to
homebuyers and land and lots to other homebuilders or real estate developers when all closing conditions are met, including the
passage of title and the receipt of consideration, and the collection of associated receivables, if any, is reasonably assured.
When it is determined that there are uncompleted performance obligations, the transaction price and the related profit for those
uncompleted performance obligations are deferred for recognition in future periods based on the principles of ASC 606. The
most common examples of uncompleted performance obligations are unfinished pools or outdoor landscaping features that are
unable to be completed due to weather or other circumstances.
Following the adoption of ASC 606, the timing of revenue recognition for all of our contracts remained materially
consistent with our historical revenue recognition policy due to the nature of our revenue generating activities, with the most
common difference under ASC 606 relating to the deferral of revenue due to these uncompleted performance obligations at the
time we deliver new homes to our homebuyers.
When we enter into a contract with a homebuyer, we sometimes receive a nonrefundable deposit that is recognized as
revenue under circumstances in which a contract is canceled by the homebuyer. These amounts are recognized as home sales
revenue at the time a contract is canceled by the homebuyer. We have not experienced significant contract modifications
impacting the timing of revenue recognition under ASC 606, nor will we be required to use estimates in the application of the
core revenue recognition principles.
Real Estate Inventories and Cost of Sales
Real estate inventories consist of land, land under development, homes under construction, completed homes and model
homes and are stated at cost, net of impairment losses. We capitalize direct carrying costs, including interest, property taxes
and related development costs to inventories. Field construction supervision and related direct overhead are also included in the
capitalized cost of inventories. Direct construction costs are specifically identified and allocated to homes while other common
costs, such as land, land improvements and carrying costs, are allocated to homes within a community based upon their
anticipated relative sales or fair value. In accordance with ASC Topic 835, Interest (“ASC 835”), homebuilding interest
capitalized as a cost of inventories owned is included in costs 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. Homebuilding cost of sales is recognized at the same time revenue is
recognized and is recorded based upon total estimated costs to be allocated to each home within a community. Any changes to
the estimated costs are allocated to the remaining undelivered lots and homes within their respective community. The
estimation and allocation of these costs require a substantial degree of judgment by management.
The estimation process involved in determining relative sales or fair values is inherently uncertain because it involves
estimating future sales values of homes before delivery. Additionally, in determining the allocation of costs to a particular land
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parcel or individual home, we rely on project budgets that are based on a variety of assumptions, including assumptions about
construction schedules and future costs to be incurred. It is common that actual results differ from budgeted amounts for
various reasons, including construction delays, increases in costs that have not been committed or unforeseen issues
encountered during construction that fall outside the scope of existing contracts, or costs that come in less than originally
anticipated. While the actual results for a particular construction project are accurately reported over time, a variance between
the budget and actual costs could result in the understatement or overstatement of costs and have a related impact on gross
margins between reporting periods. To reduce the potential for such variances, we have procedures that have been applied on a
consistent basis, including assessing and revising project budgets on a periodic basis, obtaining commitments from
subcontractors and vendors for future costs to be incurred and utilizing the most recent information available to estimate costs.
If there are indications of impairment, we perform a detailed budget and cash flow review of our real estate assets 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 costs; (iv) alternative product offerings that may be
offered that 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 monthly sales absorption rates has a direct impact on the estimated per unit sales price of
a home and the level of time sensitive costs (such as indirect construction, overhead and carrying 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 assets are 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. It is reasonably possible that changes in market conditions could change
management's estimates of future cash inflows and outflows, leading to future impairment charges. We perform a quarterly
review for indicators of impairment. For the years ended December 31, 2018 and December 31, 2016, we did not incur any real
estate inventory impairment charges. For the year ended December 31, 2017, we recorded impairment charges of $854,000.
Warranty Reserves
In the normal course of business, we incur warranty-related costs associated with homes that have been delivered to
homebuyers. Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related
home sales revenues are recognized while indirect warranty overhead salaries and related costs are charged to cost of sales in
the period incurred. Factors that affect the warranty accruals include the number of homes delivered, historical and anticipated
rates of warranty claims and cost per claim. Our primary assumption in estimating the amounts we accrue for warranty costs is
that historical claims experience is a strong indicator of future claims experience. In addition, we maintain general liability
insurance designed to protect us against a portion of our risk of loss from warranty and 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.
Our warranty reserve is based on actuarial analysis that uses our historical claim and expense data, as well as industry
data to estimate these overall costs. Key assumptions used in developing these estimates include claim frequencies, severities
and resolution patterns, which can occur over an extended period of time. These estimates are subject to variability due to the
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length of time between the delivery of a home to a homebuyer and when a warranty or construction defect claim is made, and
the ultimate resolution of such claim; uncertainties regarding such claims relative to our markets and the types of product we
build; and legal or regulatory actions and/or interpretations, among other factors. Due to the degree of judgment involved and
the potential for variability in these underlying assumptions, our actual future costs could differ from those estimated. 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.
We also record expected recoveries from insurance carriers based on actual insurance claims made and actuarially
determined amounts that depend on various factors, including, the above-described reserve estimates, our insurance policy
coverage limits for the applicable policy years and historical recovery rates. Because of the inherent uncertainty and variability
in these assumptions, our actual insurance recoveries could differ significantly from amounts currently estimated.
Income Taxes
We account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”). Deferred tax assets and
liabilities are recorded based on future tax consequences of both temporary differences between the amounts reported for
financial reporting purposes and the amounts deductible for income tax purposes, and are measured using enacted tax rates
expected to apply in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted.
Each quarter we assess our deferred tax assets to determine whether all or any portion of the assets is more likely than
not unrealizable under ASC 740. We are required to establish a valuation allowance for any portion of the asset we conclude is
more likely than not to be unrealizable. 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. Due to uncertainties inherent in the estimation process, it is possible that actual results may vary from
estimates.
The enactment of the Tax Cuts and Jobs Act in December 2017, among other things, reduced the federal corporate tax
rate to 21% from 35%, effective January 1, 2018. This resulted in a $22.0 million reduction in our deferred tax asset for the
year ended December 31, 2017. For further details, see Note 15, Income Taxes, of the notes to our consolidated financial
statements included elsewhere in this annual report on Form 10-K.
We classify any interest and penalties related to income taxes as part of income tax expense.
Goodwill and Other Intangible Assets
In accordance with ASC Topic 350, Intangibles-Goodwill and Other (“ASC 350”), we evaluate goodwill and indefinite-
lived intangible assets for impairment on an annual basis, or more frequently if events or changes in circumstances between
annual tests indicate that it is more likely than not that the asset is impaired. We have identified one reporting unit with
goodwill, TRI Pointe Homes, and performed our annual goodwill impairment evaluation as of October 1, 2018. For further
details on goodwill, see Note 8, Goodwill and Other Intangible Assets, of the notes to our consolidated financial statements
included elsewhere in this annual report on Form 10-K.
For our TRI Pointe Homes reporting unit, we performed a qualitative assessment to determine whether it is more likely
than not that its fair value is less than its carrying amount. Upon completion of the October 2018 annual impairment
assessment, we determined that no goodwill impairment was indicated. As of December 31, 2018, we are not aware of any
significant indicators of impairment that exist for our goodwill that would require additional analysis.
An impairment of our indefinite-lived intangible asset is based on a comparison of its fair value to book value, without
consideration of any recoverability due to the indefinite nature of the asset. As of December 31, 2018, we believe that our
indefinite-lived intangible asset continues to have an indefinite life and that its fair value exceeds its carrying value. For further
details on our indefinite-lived intangible asset, see Note 8, Goodwill and Other Intangible Assets, of the notes to our
consolidated financial statements included elsewhere in this annual report on Form 10-K.
In accordance with ASC Topic 360, Property, Plant and Equipment ("ASC 360"), we evaluate finite-lived intangible
assets for impairment on an annual basis, or more frequently if events or changes in circumstances between annual tests
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indicate that it is more likely than not that the asset is impaired. An impairment in the carrying value of our finite-lived
intangible asset is recognized whenever anticipated future undiscounted cash flows from the asset become unrecoverable and
are estimated to be less than its carrying value. As of December 31, 2018, we believe that the carrying value of our finite-lived
intangible asset is recoverable and that its fair value is greater than its carrying value. For further details on our finite-lived
intangible asset, see Note 8, Goodwill and Other Intangible Assets, of the notes to our consolidated financial statements
included elsewhere in this annual report on Form 10-K.
Significant management judgment is required in the forecasts of future operating results that are used in our impairment
evaluations. Our estimates are consistent with the plans and estimates that we use to manage our business. It is possible,
however, that the plans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and
estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these
assets, we could incur future impairment charges.
Related Party Transactions
We had no related party transactions for the years ended December 31, 2018 and 2017, respectively.
Recently Issued Accounting Standards
See Note 1, Organization and Summary of Significant Accounting Policies, of the notes to our consolidated financial
statements included elsewhere in this annual report on Form 10-K.
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Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks related to fluctuations in interest rates on our outstanding debt. We did not utilize swaps,
forward or option contracts on interest rates or commodities, or other types of derivative financial instruments as of or during
the year ended December 31, 2018. We have not entered into and currently do not hold derivatives for trading or speculative
purposes. Many of the statements contained in this section are forward looking and should be read in conjunction with our
disclosures under the heading “Cautionary Note Concerning Forward-Looking Statements.”
The table below details the principal amount and the average interest rates for the outstanding debt for each category
based upon the expected maturity or disposition dates. The fair value of our debt, which consists of the Credit Facility and
Senior Notes, is based on quoted market prices for the same or similar instruments as of December 31, 2018.
Expected Maturity Date
December 31,
2019
2020
2021
2022
2023
Thereafter
Total
(dollars in thousands)
Liabilities:
Estimated
Fair Value
Variable rate debt
$
— $
— $
— $
— $
— $
— $
— $
—
Weighted average interest rate
—%
—%
—%
—%
—%
—%
—%
Fixed rate debt
$ 381,895
$
— $ 300,000
$
— $
— $ 750,000
$ 1,431,895
$ 1,308,826
Weighted average interest rate
4.4%
—%
4.9%
—%
—%
5.6%
5.1%
Based on the current interest rate management policies we have in place with respect to our outstanding debt, we do not
believe that the future market rate risks related to the above securities will have a material adverse impact on our financial
position, results of operations or liquidity. For a more detailed description of our long-term debt, please see Note 11, Senior
Notes and Unsecured Revolving Credit Facility, of the notes to our consolidated financial statements included elsewhere in this
annual report on Form 10-K.
Item 8.
Financial Statements and Supplementary Data
See Item 15 included in this annual report on Form 10-K.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that information we are required to disclose in the
reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and accumulated and communicated to management, including the Chief Executive
Officer (the “Principal Executive Officer”) and Chief Financial Officer (the “Principal Financial Officer”), as appropriate, to
allow timely decisions regarding required disclosure. Under the supervision and with the participation of senior management,
including our Principal Executive Officer and Principal Financial Officer, we evaluated our disclosure controls and procedures,
as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our Principal
Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of
December 31, 2018.
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Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial
statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the criteria in Internal Control-Integrated Framework (2013 framework) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in
Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was
effective as of December 31, 2018.
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by Ernst &
Young LLP, our independent registered public accounting firm, as stated in its attestation report which is included herein.
Changes in Internal Control Over Financial Reporting
Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated our internal control
over financial reporting to determine whether any change occurred during the fourth quarter of the year ended December 31,
2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Based
on that evaluation, there has been no such change during the fourth quarter of the period covered by this report.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of TRI Pointe Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited TRI Pointe Group, Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, TRI Pointe Group, Inc. (the Company) maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated
statements of operations, equity and cash flows for each of the three years in the period ended December 31, 2018, and the
related notes and our report dated February 26, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Irvine, California
February 26, 2019
- 67 -
Item 9B.
Other Information
None.
PART III.
Item 10.
Directors, Executive Officers and Corporate Governance
The information required in response to this item is incorporated by reference from the information contained in our
proxy statement relating to our 2019 annual meeting of stockholders (the “2019 Proxy Statement”) under the captions “Board
of Directors,” “Management,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Corporate Governance.”
Item 11.
Executive Compensation
The information required in response to this item is incorporated by reference to our 2019 Proxy Statement under the
captions “Executive Compensation,” “Compensation Committee Report,” and “Corporate Governance – Compensation
Committee Interlocks and Insider Participation.”
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholders
The information required in response to this item is incorporated by reference to our 2019 Proxy Statement under the
captions “Ownership of Our Common Stock” and “Equity Compensation Plan Information.”
Item 13.
Certain Relationships and Related Party Transactions, and Director Independence
The information required in response to this item is incorporated by reference to our 2019 Proxy Statement under the
captions “Corporate Governance” and “Certain Relationships and Related Party Transactions.”
Item 14.
Principal Accountant Fees and Services
The information required in response to this item is incorporated by reference to our 2019 Proxy Statement under the
caption “Audit Committee Matters.”
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PART IV.
Item 15.
Exhibits, Financial Statements and Financial Statement Schedules
(a) The following documents are filed as part of this annual report on Form 10-K:
(1)
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows the years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
(2)
Financial Statement Schedules
Page:
70
71
72
73
74
75
All other schedules have been omitted since the required information is presented in the financial statements and
the related notes or is not applicable.
(3)
Exhibits
The exhibits filed or furnished as part of this annual report on Form 10-K are listed in the Index to Exhibits
immediately preceding those exhibits, which Index is incorporated in this Item by reference.
- 69 -
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of TRI Pointe Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TRI Pointe Group, Inc. (the Company) as of December 31,
2018 and 2017, the related consolidated statements of operations, equity and cash flows for each of the three years in the period
ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the
Company at December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated February 26, 2019 expressed an unqualified opinion thereon.
Adoption of ASU No. 2014-09
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue
recognition and real estate inventories and cost of sales effective January 1, 2018 due to the adoption of ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606) and related Subtopic ASC 340-40, Other Assets and Deferred Costs -
Contracts with Customers.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2010.
Irvine, California
February 26, 2019
- 70 -
TRI POINTE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
Assets
Cash and cash equivalents
Receivables
Real estate inventories
Investments in unconsolidated entities
Goodwill and other intangible assets, net
Deferred tax assets, net
Other assets
Total assets
Liabilities
Accounts payable
Accrued expenses and other liabilities
Senior notes, net
Total liabilities
Commitments and contingencies (Note 13)
Equity
Stockholders’ Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized; no shares
issued and outstanding as of December 31, 2018 and 2017, respectively
Common stock, $0.01 par value, 500,000,000 shares authorized;
141,661,713 and 151,162,999 shares issued and outstanding at
December 31, 2018 and December 31, 2017, respectively
Additional paid-in capital
Retained earnings
Total stockholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
See accompanying notes.
December 31,
2018
December 31,
2017
$
277,696
51,592
3,216,059
5,410
160,427
67,768
105,251
$ 3,884,203
$
282,914
125,600
3,105,553
5,870
160,961
76,413
48,070
$ 3,805,381
$
81,313
335,149
1,410,804
1,827,266
$
72,870
330,882
1,471,302
1,875,054
—
—
1,417
658,720
1,396,787
2,056,924
13
2,056,937
$ 3,884,203
1,512
793,980
1,134,230
1,929,722
605
1,930,327
$ 3,805,381
- 71 -
TRI POINTE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Homebuilding:
Home sales revenue
Land and lot sales revenue
Other operations revenue
Total revenues
Cost of home sales
Cost of land and lot sales
Other operations expense
Sales and marketing
General and administrative
Homebuilding income from operations
Equity in (loss) income of unconsolidated entities
Other (loss) income, net
Homebuilding income before income taxes
Financial Services:
Revenues
Expenses
Equity in income of unconsolidated entities
Financial services income before income taxes
Income before income taxes
Provision for income taxes
Net income
Net income attributable to noncontrolling interests
Net income available to common stockholders
Earnings per share
Basic
Diluted
Weighted average shares outstanding
Basic
Diluted
See accompanying notes.
Year Ended December 31,
2018
2017
2016
$
$
$
$
3,244,087
8,758
8,164
3,261,009
2,536,899
25,435
3,174
187,267
155,030
353,204
(393)
(419)
352,392
1,738
582
8,517
9,673
362,065
(90,552)
271,513
(1,602)
269,911
1.82
1.81
$
$
$
$
2,732,299
74,269
2,333
2,808,901
2,173,251
14,888
2,298
137,066
137,764
343,634
(11,433)
151
332,352
1,371
331
6,426
7,466
339,818
(152,267)
187,551
(360)
187,191
1.21
1.21
$
$
$
$
2,329,336
72,272
2,314
2,403,922
1,836,327
17,367
2,247
127,903
124,119
295,959
179
312
296,450
1,220
253
4,810
5,777
302,227
(106,094)
196,133
(962)
195,171
1.21
1.21
148,183,431
149,004,690
154,134,411
155,085,366
160,859,782
161,381,499
- 72 -
TRI POINTE GROUP, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share amounts)
Number of
Common
Shares (Note 1)
161,813,750
Common
Stock
$
1,618
Additional
Paid-in
Capital
$ 911,197
Retained
Earnings
$ 751,868
Total
Stockholders'
Equity
1,664,683
$
Noncontr
olling
Interests
$ 21,780
195,171
195,171
Balance at December 31, 2015
Net income
Shares issued under share-based awards,
net
Excess tax benefit of share-based
awards, net
Minimum tax withholding paid on
behalf of employees for restricted stock
units
Stock-based compensation expense
—
373,332
—
—
—
Share repurchases
(3,560,853)
Distributions to noncontrolling
interests, net
Net effect of consolidations,
de-consolidations and other
transactions
—
—
—
4
—
—
—
(36)
—
—
—
583
(165)
(1,359)
12,612
(42,046)
—
—
Balance at December 31, 2016
158,626,229
1,586
880,822
Net income
Shares issued under share-based
awards
Minimum tax withholding paid on
behalf of employees for restricted
stock units
Stock-based compensation expense
—
1,531,475
—
—
Share repurchases
(8,994,705)
Distributions to noncontrolling
interests, net
Net effect of consolidations,
de-consolidations and other
transactions
—
—
—
16
—
—
(90)
—
—
—
12,275
(2,896)
15,906
(112,127)
—
—
—
—
—
—
—
—
—
947,039
187,191
—
—
—
—
—
—
Total
Equity
$1,686,463
196,133
587
(165)
(1,359)
12,612
(42,082)
(3,363)
962
—
—
—
—
—
(3,363)
(316)
(316)
587
(165)
(1,359)
12,612
(42,082)
—
—
1,829,447
19,063
1,848,510
187,191
12,291
(2,896)
15,906
(112,217)
360
—
—
—
187,551
12,291
(2,896)
15,906
— (112,217)
—
(1,333)
(1,333)
— (17,485)
(17,485)
Balance at December 31, 2017
151,162,999
1,512
793,980
1,134,230
1,929,722
Cumulative effect of accounting change
(Note 1)
Net income
Shares issued under share-based
awards
Minimum tax withholding paid on
behalf of employees for restricted
stock units
Stock-based compensation expense
—
—
891,323
—
—
—
—
9
—
—
—
—
1,934
(6,049)
14,814
Share repurchases
(10,392,609)
(104)
(145,959)
Distributions to noncontrolling
interests, net
—
—
—
(7,354)
(7,354)
605
—
1,930,327
(7,354)
269,911
269,911
1,602
271,513
—
—
—
—
—
1,943
(6,049)
14,814
(146,063)
—
—
—
1,943
(6,049)
14,814
— (146,063)
—
(2,194)
(2,194)
Balance at December 31, 2018
141,661,713
$
1,417
$ 658,720
$1,396,787
$
2,056,924
$
13
$2,056,937
See accompanying notes.
- 73 -
TRI POINTE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
Equity in (income) loss of unconsolidated entities, net
Deferred income taxes, net
Amortization of stock-based compensation
Charges for impairments and lot option abandonments
Excess tax deficit of share-based awards
Changes in assets and liabilities:
Real estate inventories
Receivables
Other assets
Accounts payable
Accrued expenses and other liabilities
Returns on investments in unconsolidated entities, net
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from sale of property and equipment
Investments in unconsolidated entities
Net cash paid for acquisition
Net cash used in investing activities
Cash flows from financing activities:
Borrowings from debt
Repayment of debt
Debt issuance costs
Net repayments of debt held by variable interest entities
Contributions from noncontrolling interests
Distributions to noncontrolling interests
Proceeds from issuance of common stock under share-based
awards
Minimum tax withholding paid on behalf of employees for share-based awards
Share repurchases
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents - beginning of year
Cash and cash equivalents - end of year
See accompanying notes.
- 74 -
Year Ended December 31,
2018
2017
2016
$ 271,513
$ 187,551
$ 196,133
29,097
(8,124)
11,074
14,814
5,085
—
(91,757)
74,545
(9,895)
3,222
1,906
9,182
310,662
(31,651)
8
(2,274)
(61,495)
(95,412)
3,500
5,007
46,810
15,906
2,053
—
3,087
(4,989)
7,434
12,612
1,470
(165)
(205,229)
(44,280)
13,487
2,618
67,036
7,215
101,674
(388,145)
576
(8,501)
5,412
10,490
6,276
(158,310)
(2,605)
6
(980)
—
(3,579)
(3,985)
9
(32)
—
(4,008)
125,000
(193,105)
—
500,000
(413,726)
(5,957)
541,069
(330,858)
(5,062)
—
—
(2,194)
1,943
(6,049)
—
—
(1,333)
12,291
(2,896)
(2,442)
1,955
(5,318)
587
(1,359)
(146,063)
(220,468)
(5,218)
282,914
$ 277,696
(112,217)
(23,838)
74,257
208,657
$ 282,914
(42,082)
156,490
(5,828)
214,485
$ 208,657
TRI POINTE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Summary of Significant Accounting Policies
Organization
TRI Pointe Group, Inc. (“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 ten states, including Maracay in Arizona, Pardee
Homes in California and Nevada, Quadrant Homes in Washington, Trendmaker Homes in Texas, TRI Pointe Homes in
California, Colorado and the Carolinas and Winchester Homes in Maryland and Virginia.
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”).
The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries 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 December 31, 2018 and 2017 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.
Unless the context otherwise requires, the terms “we”, “us”, “our” and “the Company” used herein refer to TRI Pointe
Group and its consolidated subsidiaries.
Reclassifications
Certain amounts in our consolidated financial statements for prior years have been reclassified to conform to the current
period presentation, including the Company's condensed reporting of restructuring charges, included in general and
administrative expense on the consolidated statements of operations in this annual report on Form 10-K.
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.
Subsequent Events
We evaluated subsequent events up until our consolidated financial statements were filed with the Securities and
Exchange Commission.
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 a maturity date of less than three months from the date of acquisition. 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.
- 75 -
Revenue Recognition
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers
(Codified as “ASC 606”). ASC 606 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 eliminates certain
cost guidance related to construction-type and production-type contracts in accordance with ASC 970. In addition, ASC 606
includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which provided updated guidance
related to certain costs incurred in obtaining and fulfilling contracts with customers. Collectively, we refer to ASC 606 and
Subtopic 340-40 as ASC 606 throughout this filing. The core principle of ASC 606 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. We have adopted and applied this updated revenue recognition and cost policy
as of January 1, 2018. See Adoption of New Accounting Standards below.
The majority of our revenue is related to fixed-price contracts to deliver completed homes to homebuyers, and to a
much lesser degree, to deliver land or lots to other homebuilders or real estate developers. We generally deliver completed
homes to homebuyers and land and lots to other homebuilders or real estate developers when all closing conditions are met,
including the passage of title and the receipt of consideration, and the collection of associated receivables, if any, is reasonably
assured. When it is determined that there are uncompleted performance obligations, the transaction price and the related profit
for those uncompleted performance obligations are deferred for recognition in future periods based on the principles of ASC
606. The most common examples of uncompleted performance obligations are unfinished pools or outdoor landscaping
features that are unable to be completed due to weather or other circumstances.
Following the adoption of ASC 606, the timing of revenue recognition for all of our contracts remained materially
consistent with our historical revenue recognition policy due to the nature of our revenue generating activities, with the most
common difference under ASC 606 relating to the deferral of revenue due to these uncompleted performance obligations at the
time we deliver new homes to our homebuyers.
When we enter into a contract with a homebuyer, we sometimes receive a nonrefundable deposit that is recognized as
revenue under circumstances in which a contract is canceled by the homebuyer. These amounts are recognized as home sales
revenue at the time a contract is canceled by the homebuyer. We have not experienced significant contract modifications
impacting the timing of revenue recognition under ASC 606, nor will we be required to use estimates in the application of the
core revenue recognition principles.
Real Estate Inventories and Cost of Sales
Real estate inventories consist of land, land under development, homes under construction, completed homes and model
homes and are stated at cost, net of impairment losses. We capitalize direct carrying costs, including interest, property taxes
and related development costs to inventories. Field construction supervision and related direct overhead are also included in the
capitalized cost of inventories. Direct construction costs are specifically identified and allocated to homes while other common
costs, such as land, land improvements and carrying costs, are allocated to homes within a community based upon their
anticipated relative sales or fair value. In accordance with ASC Topic 835, Interest (“ASC 835”), homebuilding interest
capitalized as a cost of inventories owned is included in costs 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. Homebuilding cost of sales is recognized at the same time revenue is
recognized and is recorded based upon total estimated costs to be allocated to each home within a community. Any changes to
the estimated costs are allocated to the remaining undelivered lots and homes within their respective community. The
estimation and allocation of these costs require a substantial degree of judgment by management.
The estimation process involved in determining relative sales or fair values is inherently uncertain because it involves
estimating future sales values of homes before delivery. Additionally, in determining the allocation of costs to a particular land
parcel or individual home, we rely on project budgets that are based on a variety of assumptions, including assumptions about
construction schedules and future costs to be incurred. It is common that actual results differ from budgeted amounts for
various reasons, including construction delays, increases in costs that have not been committed or unforeseen issues
encountered during construction that fall outside the scope of existing contracts, or costs that come in less than originally
anticipated. While the actual results for a particular construction project are accurately reported over time, a variance between
the budget and actual costs could result in the understatement or overstatement of costs and have a related impact on gross
margins between reporting periods. To reduce the potential for such variances, we have procedures that have been applied on a
- 76 -
consistent basis, including assessing and revising project budgets on a periodic basis, obtaining commitments from
subcontractors and vendors for future costs to be incurred and utilizing the most recent information available to estimate costs.
If there are indications of impairment, we perform a detailed budget and cash flow review of our real estate assets 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 costs; (iv) alternative product offerings that may be
offered that 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 monthly sales absorption rates has a direct impact on the estimated per unit sales price of
a home and the level of time sensitive costs (such as indirect construction, overhead and carrying 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 assets are 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. We perform a quarterly review for indicators of impairment. For the years
ended December 31, 2018 and December 31, 2016, we did not incur any real estate inventory impairment charges. For the year
ended December 31, 2017, we recorded impairment charges of $854,000.
Warranty Reserves
In the normal course of business, we incur warranty-related costs associated with homes that have been delivered to
homebuyers. Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related
home sales revenues are recognized while indirect warranty overhead salaries and related costs are charged to cost of sales in
the period incurred. Factors that affect the warranty accruals include the number of homes delivered, historical and anticipated
rates of warranty claims and cost per claim. Our primary assumption in estimating the amounts we accrue for warranty costs is
that historical claims experience is a strong indicator of future claims experience. In addition, we maintain general liability
insurance designed to protect us against a portion of our risk of loss from warranty and 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.
- 77 -
Our warranty reserve is based on actuarial analysis that uses our historical claim and expense data, as well as industry
data to estimate these overall costs. Key assumptions used in developing these estimates include claim frequencies, severities
and resolution patterns, which can occur over an extended period of time. These estimates are subject to variability due to the
length of time between the delivery of a home to a homebuyer and when a warranty or construction defect claim is made, and
the ultimate resolution of such claim; uncertainties regarding such claims relative to our markets and the types of product we
build; and legal or regulatory actions and/or interpretations, among other factors. Due to the degree of judgment involved and
the potential for variability in these underlying assumptions, our actual future costs could differ from those estimated. 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.
We also record expected recoveries from insurance carriers based on actual insurance claims made and actuarially
determined amounts that depend on various factors, including, the above-described reserve estimates, our insurance policy
coverage limits for the applicable policy years and historical recovery rates. Because of the inherent uncertainty and variability
in these assumptions, our actual insurance recoveries could differ significantly from amounts currently estimated.
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 (loss) income of unconsolidated entities in the accompanying consolidated statements of operations. We
evaluate our investments in unconsolidated entities for impairment when events and circumstances indicate that the carrying
value of the investment has been impaired beyond a temporary period of time. For the year ended December 31, 2017, we had
a $13.2 million impairment charge related to a joint venture formed as a limited liability company in 1999 for the entitlement
and development of land located in Los Angeles County, California. For the years ended December 31, 2018 and 2016, we did
not have any impairment charges related to investments in unconsolidated entities.
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. Share-based awards are expensed on a straight-line basis over the expected vesting
period.
- 78 -
Sales and Marketing Expense
Following the adoption of ASC 606 on January 1, 2018, costs incurred for tangible assets directly used in the sales
process that were previously capitalized to real estate inventories and amortized to cost of home sales, such as our sales offices,
and model landscaping and furnishings, are capitalized to other assets and amortized to selling expense as the underlying
homes are delivered. All other sales and marketing costs that were previously capitalized to real estate inventories and
amortized to cost of home sales, such as advertising signage, brochures, and model and sales office conversion costs are
expensed as incurred as selling expense. See Adoption of New Accounting Standards below.
Income Taxes
We account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”). Deferred tax assets and
liabilities are recorded based on future tax consequences of both temporary differences between the amounts reported for
financial reporting purposes and the amounts deductible for income tax purposes, and are measured using enacted tax rates
expected to apply in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted.
Each quarter we assess our deferred tax assets to determine whether all or any portion of the assets is more likely than
not unrealizable under ASC 740. We are required to establish a valuation allowance for any portion of the asset we conclude is
more likely than not to be unrealizable. 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. Due to uncertainties inherent in the estimation process, it is possible that actual results may vary from
estimates.
The enactment of the Tax Cuts and Jobs Act in the fourth quarter of 2017, among other things, reduced the federal
corporate tax rate to 21% from 35%, effective January 1, 2018. This resulted in a $22.0 million reduction in our deferred tax
asset for the year ended December 31, 2017. For further details, see Note 15, Income Taxes.
We classify any interest and penalties related to income taxes as part of income tax expense.
Business Combinations
We account for business combinations in accordance with ASC Topic 805, Business Combinations, if the assets acquired
and liabilities assumed constitute a business. For acquired companies constituting a business, we recognize the identifiable
assets acquired and liabilities assumed at their acquisition-date fair values and recognize any excess of total consideration paid
over the fair value of the identifiable assets as goodwill. During the fourth quarter of 2018 we acquired a Dallas-based
homebuilder for an all cash purchase price of approximately $61.5 million. This transaction was accounted for as a business
combination in accordance with ASC 805, Business Combinations. For further details, see Note 5, Real Estate Inventories.
Goodwill and Other Intangible Assets
In accordance with ASC Topic 350, Intangibles-Goodwill and Other (“ASC 350”), we evaluate goodwill and indefinite-
lived intangible assets for impairment on an annual basis, or more frequently if events or changes in circumstances between
annual tests indicate that it is more likely than not that the asset is impaired. We have identified one reporting unit with
goodwill, TRI Pointe Homes, and performed our annual goodwill impairment evaluation as of October 1, 2018. For further
details on goodwill, see Note 8, Goodwill and Other Intangible Assets.
For our TRI Pointe Homes reporting unit, we performed a qualitative assessment to determine whether it is more likely
than not that its fair value is less than its carrying amount. Upon completion of the October 2018 annual impairment
assessment, we determined that no goodwill impairment was indicated. As of December 31, 2018, we are not aware of any
significant indicators of impairment that exist for our goodwill that would require additional analysis.
An impairment of our indefinite-lived intangible asset is based on a comparison of its fair value to book value, without
consideration of any recoverability due to the indefinite nature of the asset. As of December 31, 2018, we believe that our
indefinite-lived intangible asset continues to have an indefinite life and that its fair value exceeds its carrying value. For further
details on our indefinite-lived intangible asset, see Note 8, Goodwill and Other Intangible Assets.
In accordance with ASC Topic 360, Property, Plant and Equipment ("ASC 360"), we evaluate finite-lived intangible
assets for impairment on an annual basis, or more frequently if events or changes in circumstances between annual tests
- 79 -
indicate that it is more likely than not that the asset is impaired. An impairment in the carrying value of our finite-lived
intangible asset is recognized whenever anticipated future undiscounted cash flows from the asset become unrecoverable and
are estimated to be less than its carrying value. As of December 31, 2018, we believe that the carrying value of our finite-lived
intangible asset is recoverable and that its fair value is greater than its carrying value. For further details on our finite-lived
intangible asset, see Note 8, Goodwill and Other Intangible Assets.
Significant management judgment is required in the forecasts of future operating results that are used in our impairment
evaluations. Our estimates are consistent with the plans and estimates that we use to manage our business. It is possible,
however, that the plans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and
estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these
assets, we could incur future impairment charges.
Recently Issued Accounting Standards Not Yet Adopted
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Codified as “ASC 842”), which
requires an entity to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases with
durations of greater than 12 months, but record expenses on the statements of operations in a manner similar to current
accounting. The guidance also requires more disclosures about leases in the notes to consolidated financial statements. ASC
842 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 by recognizing a cumulative effect adjustment to the
opening balance sheet. We have elected the transition package of three practical expedients permitted under ASC 842, which
among other things, allows us to retain the current operating classification for all our existing leases prior to the effective
adoption period. We have substantially completed our evaluation on the impact that the adoption of ASC 842 may have on our
consolidated financial statements and disclosures, and we expect to recognize additional lease assets and liabilities of
approximately $58 million to reflect the present value of remaining lease payments under existing leasing arrangements. The
actual impact may differ from our estimate. While the adoption of ASC 842 will impact on our consolidated balance sheet, we
do not expect that there will be a material impact to our consolidated statements of operations or cash flows.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic
350): Simplifying the Accounting for Goodwill Impairment (“ASU 2017-04”), which removes the requirement to perform a
hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by
which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption
permitted, and applied prospectively. We do not expect ASU 2017-04 will have a material impact on our financial statements.
Adoption of New Accounting Standards
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which provides guidance on how certain cash
receipts and cash payments are to be presented and classified in the statement of cash flows. We adopted ASU 2016-15 on
January 1, 2018 and our adoption did not have a material impact on our consolidated financial statements.
On January 1, 2018, we adopted ASC 606 using the modified retrospective approach applying the method of presenting
the standard of ASC 606 to only those contracts not considered completed under legacy GAAP. As a result of this application
of ASC 606, no prior period results have been recast and the standard has been applied prospectively as of January 1, 2018.
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet resulting from the adoption of
ASC 606 was as follows (in thousands):
Assets
Real estate inventories
Deferred income tax asset
Other assets
Equity
Retained earnings
Balance at December 31, 2017
Adjustments due to ASC 606
Balance at January 1, 2018
$
3,105,553
$
76,413
48,070
(49,317) $
2,429
39,534
3,056,236
78,842
87,604
1,134,230
(7,354)
1,126,876
Our cumulative adjustment to retained earnings on January 1, 2018 related primarily to the impact of ASC 340-40 and
the timing of recognition and classification in our consolidated financial statements of certain sales office, model and other
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marketing related costs that we incur to obtain sales contracts from our customers. See our Real Estate Inventories and Cost of
Sales and Revenue Recognition accounting policy above.
In accordance with ASC 606 disclosure requirements, the impact of adopting ASC 606 on our consolidated statements of
operations and balance sheets for the year ended December 31, 2018 was as follows (in thousands, except per share amounts):
Statements of Operations
Revenues
Home sales
Costs and expenses
Cost of home sales
Sales and marketing
Provision for income taxes
Net income
Diluted earnings per share
Balance Sheet
Assets
Real estate inventories
Deferred tax assets, net
Other assets
Liabilities
Accrued expenses and other liabilities
Equity
Retained earnings
Contracts with Customers
Year Ended December 31, 2018
Balances
Without
Adoption of
ASC 606
Effect of
Change
Higher/
(Lower)
As Reported
$ 3,244,087
$ 3,244,669
$
(582)
2,536,899
2,575,992
187,267
(90,552)
269,911
1.81
$
159,482
(87,871)
261,866
1.76
$
$
(39,093)
27,785
2,681
8,045
0.05
As of December 31, 2018
Balances
Without
Adoption of
ASC 606
Effect of
Change
Higher/
(Lower)
As Reported
$ 3,216,059
$ 3,258,232
$
67,768
105,251
62,656
64,033
(42,173)
5,112
41,218
335,149
335,344
(195)
1,396,787
1,392,435
4,352
In consideration of the appropriate revenue recognition for our contracts with customers, we first assessed our ordinary
operations in order to capture all revenue transactions with a counter-party appropriately considered a customer. Historically,
our ordinary homebuilding revenue generating activities have included contracts with homebuyers to deliver completed homes
and to a much lesser extent, contracts with other homebuilders or real estate developers to deliver land or lots in exchange for
consideration. The majority of our homebuilding contracts with customers typically include a single performance obligation,
which is the transfer of control of the real estate property when all closing conditions are met.
In addition to our core homebuilding operations, we undertake service operations with customers in the form of our
financial services reportable segment (“TRI Pointe Solutions”), which is comprised of our mortgage financing operations, title
services operations and property and casualty insurance agency operations. Our mortgage financing operation (“TRI Pointe
Connect”) can act as a preferred mortgage broker to our homebuyers in all of the markets in which we operate. TRI Pointe
Connect was formed as a joint venture with an established mortgage lender and is accounted for under the equity method of
accounting. Our title services operation (“TRI Pointe Assurance”) provides title examinations for our homebuyers in Texas,
Maryland and Virginia. TRI Pointe Assurance is a wholly owned subsidiary of TRI Pointe and acts as a title agency for First
American Title Insurance Company. Our property and casualty insurance agency operations (“TRI Pointe Advantage”) is a
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wholly owned subsidiary of TRI Pointe that provides property and casualty insurance agency services that help facilitate the
closing process in all of the markets in which we operate.
We do not currently have any long-term contracts with customers. ASC 606 provides certain practical expedients that
limit some of the accounting treatments and disclosure requirements existing under this accounting standard. We do not
disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Disaggregation of Revenues
We generate revenues from a mix of homebuilding operations and financial services operations. Due to the nature of our
revenue generating activities, the disaggregated revenue reported on our consolidated statement of operations, in conjunction
with the revenues reported in our segment disclosure, is deemed sufficient to report revenue from contracts with customers in
accordance with the disaggregation disclosure requirements of ASC 606. We report total revenues in Note 2, Segment
Information, which is fully comprised of our revenues from contracts with customers. While the total homebuilding revenues
by segment include a mix of home sales revenue, land and lot sales revenue and other operations revenue, all material revenue
amounts outside of home sales revenue are attributed to their respective homebuilding segments in the discussion below. Our
consideration of disaggregated revenue consisted of a variety of facts and circumstances pertaining to our contracts with
customers. These considerations included the nature, amounts, timing and other characteristics and economic factors present
within each revenue line item appearing on our consolidated statement of operations. See below for further commentary
regarding each of our revenue streams from contracts with customers.
Home sales revenue
We generate the majority of our total revenues from home sales, which consists of our core business operation of
building and delivering completed homes to homebuyers. Included in home sales revenue are forfeited deposits, which occur
when homebuyers cancel home purchase contracts that include a nonrefundable deposit. Both revenue from forfeited deposits
and deferred revenue resulting from uncompleted performance obligations existing at the time we deliver new homes to our
homebuyers is immaterial.
Land and lot sales revenue
Historically, we have generated land and lot sales revenue from a small number of transactions, although in some years
we have realized a significant amount of revenue and gross margin. We do not expect our future land and lot sales revenue to
be material, but we still consider these sales to be an ordinary part of our business, thus meeting the definition of contracts with
customers. Similar to our home sales, revenue from land and lot sales is typically fully recognized when the land and lot sales
transactions are consummated, at which time no further performance obligations are left to be satisfied. Some of our historical
land and lot sales have included future profit participation rights. We will recognize future land and lot sales revenue in the
periods in which all closing conditions are met, subject to the constraint on variable consideration related to profit participation
rights, if such rights exist in the sales contract.
Other operations revenue
The majority of our other homebuilding operations revenue relates to a ground lease at our Quadrant Homes reporting
segment. We are responsible for making lease payments to the land owner, and we collect sublease payments from the buyers
of the buildings. This ground lease is accounted for in accordance with ASC Topic 840, Leases. We do not recognize a
material profit on this ground lease.
Financial services revenues
TRI Pointe Solutions is a reportable segment and is comprised of our TRI Pointe Connect mortgage financing
operations, TRI Pointe Assurance title services operations, and TRI Pointe Advantage property and casualty insurance agency
operations.
Mortgage financing operations
TRI Pointe Connect was formed as a joint venture with an established mortgage lender and is accounted for under the
equity method of accounting. Based on our percentage stake in this joint venture, we record a percentage of income earned by
TRI Pointe Connect. Revenue by TRI Pointe Connect is recognized in the period in which the home sales transactions are
consummated. TRI Pointe Connect does not have a history of uncollectable amounts from these operations. TRI Pointe
Connect activity appears as equity in income of unconsolidated entities under the Financial Services section of our consolidated
statements of operations.
- 82 -
Title services operations
TRI Pointe Assurance provides title examinations for our homebuyers in Texas, Maryland and Virginia. TRI Pointe
Assurance is a wholly owned subsidiary of TRI Pointe and acts as a title agency for First American Title Insurance Company.
At the time of the consummation of the home sales transactions, we recognize a percentage of revenue captured by First
American Title Insurance Company. We do not have a history of uncollectable amounts from these operations. TRI Pointe
Assurance revenue is included in the Financial Services section of our consolidated statements of operations.
Property and casualty insurance agency operations
TRI Pointe Advantage is a wholly owned subsidiary of TRI Pointe and provides property and casualty insurance agency
services that help facilitate the closing process in all of the markets in which we operate. These operations began in February
2018 and have not generated a material amount of revenue. We expect revenue from these operations to increase as customers
use these services to procure homeowners insurance, with further revenue potential as customers renew their insurance
coverages beyond the initial coverage periods. The total consideration for these services, including renewal options, is
estimated upon the issuance of the initial insurance policy, subject to constraint. TRI Pointe Advantage revenue is included in
the Financial Services section of our consolidated statements of operations.
2.
Segment Information
We operate two principal businesses: homebuilding and financial services.
Our homebuilding operations consist of six homebuilding companies, each operating under different brand names,
through which we 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, brand names, and underlying demand and supply.
Based upon these factors, our homebuilding operations comprise the following six reportable segments: Maracay, 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, Colorado and the early stages of expansion into the Carolinas; and Winchester Homes, consisting of operations in
Maryland and Virginia.
Our TRI Pointe Solutions financial services operation is a reportable segment and is comprised of our TRI Pointe
Connect mortgage financing operations, our TRI Pointe Assurance title services operations, and our TRI Pointe Advantage
property and casualty insurance agency operations. For further details, see Note 1, Organization and Summary of Significant
Accounting Policies.
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, 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 used for our consolidated financial statements, as described
in Note 1, Organization 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.
- 83 -
Total revenues and income before income taxes for each of our reportable segments were as follows (in thousands):
Revenues
Maracay
Pardee Homes
Quadrant Homes
Trendmaker Homes
TRI Pointe Homes
Winchester Homes
Total homebuilding revenues
Financial services
Total
Income before taxes
Maracay
Pardee Homes
Quadrant Homes
Trendmaker Homes
TRI Pointe Homes
Winchester Homes
Corporate
Total homebuilding income before income taxes
Financial services
Total
2018
2017
2016
$
$
$
$
263,321
999,710
307,706
310,730
1,073,592
305,950
3,261,009
1,738
3,262,747
23,281
191,793
38,366
25,228
115,632
23,981
(65,889)
352,392
9,673
362,065
$
$
$
$
296,768
826,033
247,939
253,825
927,247
257,089
2,808,901
1,371
2,810,272
23,987
198,738
32,671
16,764
89,811
15,472
(45,091)
332,352
7,466
339,818
$
$
$
$
255,253
730,848
213,221
244,001
723,186
237,413
2,403,922
1,220
2,405,142
17,189
204,237
21,209
15,353
62,013
16,147
(39,698)
296,450
5,777
302,227
Total real estate inventories and total assets for each of our reportable segments, as of the date indicated, were as
follows (in thousands):
Real estate inventories
Maracay
Pardee Homes
Quadrant Homes
Trendmaker Homes
TRI Pointe Homes
Winchester Homes
Total
Total assets
Maracay
Pardee Homes
Quadrant Homes
Trendmaker Homes
TRI Pointe Homes
Winchester Homes
Corporate
Total homebuilding assets
Financial services
Total
December 31,
2018
December 31,
2017
$
$
$
$
293,217
1,286,877
279,486
271,061
812,799
272,619
3,216,059
318,703
1,391,503
313,947
325,943
987,610
298,602
228,010
3,864,318
19,885
3,884,203
$
$
$
$
243,883
1,245,659
257,887
204,926
855,727
297,471
3,105,553
268,866
1,346,296
312,803
224,995
1,062,920
313,921
262,740
3,792,541
12,840
3,805,381
- 84 -
3.
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):
Numerator:
Income available to common stockholders
$
269,911
$
187,191
$
195,171
Year Ended December 31,
2018
2017
2016
Denominator:
Basic weighted-average shares outstanding
Effect of dilutive shares:
Stock options and unvested restricted stock units
Diluted weighted-average shares outstanding
Earnings per share
Basic
Diluted
Antidilutive stock options not included in diluted earnings per share
4.
Receivables, Net
Receivables, net consisted of the following (in thousands):
Escrow proceeds and other accounts receivable, net
Warranty insurance receivable (Note 13)
Total receivables
148,183,431
154,134,411
160,859,782
821,259
149,004,690
950,955
155,085,366
521,717
161,381,499
$
$
1.82
1.81
1,645,816
$
$
1.21
1.21
3,288,340
$
$
1.21
1.21
4,551,337
December 31,
2018
December 31,
2017
$
$
13,995
37,597
51,592
$
$
89,783
35,817
125,600
Receivables are evaluated for collectability and allowances for potential losses are established or maintained on
applicable receivables when collection becomes doubtful. Receivables were net of allowances for doubtful accounts of
$667,000 in 2018 and $330,000 in 2017.
5.
Real Estate Inventories
Real estate inventories consisted of the following (in thousands):
Real estate inventories owned:
Homes completed or under construction
Land under development
Land held for future development
Model homes
Total real estate inventories owned
Real estate inventories not owned:
Land purchase and land option deposits
Total real estate inventories not owned
Total real estate inventories
December 31,
2018
December 31,
2017
$
959,911
1,743,537
201,874
238,828
3,144,150
$
793,685
1,934,556
138,651
211,658
3,078,550
71,909
71,909
$ 3,216,059
27,003
27,003
$ 3,105,553
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
- 85 -
development costs related to land where development activity has not yet begun or has been suspended, but is expected to
occur in the future. The real estate inventories owned balance was impacted by our one-time cumulative adjustment entry
resulting from the adoption of ASC 606. As a result of our cumulative adjustment, the December 31, 2017 balance decreased
by $49.3 million on January 1, 2018. For further details, see Note 1, Organization and Summary of Significant Accounting
Policies.
During the fourth quarter of 2018, we acquired a Dallas-based homebuilder for an all cash purchase price of
approximately $61.5 million. This transaction was accounted for as a business combination in accordance with ASC Topic 805,
Business Combinations ("ASC 805"). As a result of this transaction, we recorded approximately $63.2 million of real estate
inventories owned, approximately $5.5 million of other assets and approximately $7.2 million of accounts payable and other
accrued liabilities. As of December 31, 2018, the purchase price accounting reflected in the accompanying financial statements
is substantially complete and is based on estimates and assumptions that are subject to change within the measurement period
that may impact the fair value of the assets and liabilities above (including inventories, other assets and accrued liabilities). All
net assets and operations acquired in this transaction are included in the Trendmaker Homes reporting segment in Note 2,
Segment Information. This transaction did not materially impact our statement of operations for the year ended December 31,
2018.
Real estate inventories not owned represents deposits related to land purchase and land and lot option agreements as
well as consolidated inventory held by variable interest entities. For further details, see Note 7, Variable Interest Entities.
Interest incurred, capitalized and expensed were as follows (in thousands):
Interest incurred
Interest capitalized
Interest expensed
Capitalized interest in beginning inventory
Interest capitalized as a cost of inventory
Interest previously capitalized as a cost of inventory, included in
cost of sales
Capitalized interest in ending inventory
Year Ended December 31,
2018
2017
2016
$
91,631
(91,631)
— $
$
176,348
91,631
$
84,264
(84,264)
— $
$
157,329
84,264
68,306
(68,306)
—
140,311
68,306
(83,579)
184,400
$
(65,245)
176,348
$
(51,288)
157,329
$
$
$
$
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 on the consolidated statements of operations.
Real Estate Inventory Impairments and Land Option Abandonments
Real estate inventory impairments and land option abandonments consisted of the following (in thousands):
Real estate inventory impairments
Land and lot option abandonments and pre-acquisition costs
Total
Year Ended December 31,
2018
2017
2016
$
$
— $
5,085
5,085
$
854
1,199
2,053
$
$
—
1,470
1,470
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.
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.
- 86 -
Real estate inventory impairments and land option abandonments are recorded in cost of home sales and cost of land and
lot sales on the consolidated statements of operations.
6.
Investments in Unconsolidated Entities
As of December 31, 2018, we held equity investments in four 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 3% to 65%, 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):
Limited liability company interests
General partnership interests
Total
December 31,
2018
2017
$
$
2,701
2,709
5,410
$
$
2,687
3,183
5,870
In the fourth quarter of 2017, we fully impaired a $13.2 million investment in a joint venture formed as a limited liability
company in 1999 for the entitlement and development of land located in Los Angeles County, California. This $13.2 million
impairment charge is included in equity in (loss) income of unconsolidated entities under our homebuilding operations on the
consolidated statements of operations. Although we continue to hold a 3% equity stake in the joint venture, we are a non-
funding member of the limited liability company and we expect our equity stake to be further diluted. This impairment charge
is included in the Pardee Homes reporting segment in Note 2, Segment Information.
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):
Assets
Cash
Receivables
Real estate inventories
Other assets
Total assets
Liabilities and equity
Accounts payable and other liabilities
Company’s equity
Outside interests' equity
Total liabilities and equity
- 87 -
December 31,
2018
2017
$
$
$
$
13,337
4,674
99,864
811
118,686
11,631
5,410
101,645
118,686
$
$
$
$
11,678
6,564
99,997
936
119,175
12,208
5,870
101,097
119,175
Results of operations from unconsolidated entities (in thousands):
Net sales
Other operating expense
Other income
Net income
Company’s equity in income (loss) of unconsolidated entities
7.
Variable Interest Entities
Year Ended December 31,
2018
2017
2016
$
$
$
28,745
(17,447)
97
11,395
8,124
$
$
$
$
24,247
(13,904)
120
10,463
$
(5,007) $
18,725
(11,315)
4
7,414
4,989
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 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. Additionally, we have entered into land banking arrangements
which require us to complete development work even if we terminate the option to procure land or lots.
The following provides a summary of our interests in land option agreements (in thousands):
December 31, 2018
December 31, 2017
Deposits
Remaining
Purchase
Price
Consolidated
Inventory
Held by VIEs
Deposits
Remaining
Purchase
Price
Consolidated VIEs
Unconsolidated VIEs
Other land option agreements
Total
$
$
— $
— $
— $
— $
— $
41,198
30,711
71,909
433,720
307,498
$ 741,218
N/A
N/A
$
— $
3,418
23,585
27,003
112,590
269,349
$ 381,939
Consolidated
Inventory
Held by VIEs
—
N/A
N/A
—
$
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 $7.5 million and $4.5 million as of December 31, 2018 and 2017, respectively.
These pre-acquisition costs were included in real estate inventories as land under development on our consolidated balance
sheets.
- 88 -
8.
Goodwill and Other Intangible Assets
The Company recorded $139.3 million of goodwill in connection with the Merger with WRECO. As of December 31,
2018 and 2017, $139.3 million of goodwill is included in goodwill and other intangible assets, net, on each of the consolidated
balance sheets. The Company's goodwill balance is included in the TRI Pointe Homes reporting segment in Note 2, Segment
Information.
We have two intangible assets as of December 31, 2018, comprised of an existing trade name from the acquisition of
Maracay in 2006, which has a 20 year useful life, and a TRI Pointe Homes trade name resulting from the acquisition of
WRECO in 2014, which has an indefinite useful life.
Goodwill and other intangible assets consisted of the following (in thousands):
December 31, 2018
December 31, 2017
Goodwill
Trade names
Total
Gross
Carrying
Amount
$ 139,304
27,979
$ 167,283
Net
Carrying
Amount
Accumulated
Amortization
$
— $ 139,304
(6,856)
21,123
(6,856) $ 160,427
$
Gross
Carrying
Amount
$ 139,304
27,979
$ 167,283
Net
Carrying
Amount
Accumulated
Amortization
$
— $ 139,304
(6,322)
21,657
(6,322) $ 160,961
$
The remaining useful life of our amortizing intangible asset related to Maracay was 7.2 and 8.2 years as of December 31,
2018 and 2017, respectively. Amortization expense related to this intangible asset was $534,000 for each of the years ended
December 31, 2018 and 2017, and was charged to sales and marketing expense. Our $17.3 million indefinite life intangible
asset related to 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 for the next five years and thereafter is (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
9.
Other Assets
Other assets consisted of the following (in thousands):
Prepaid expenses
Refundable fees and other deposits
Development rights, held for future use or sale
Deferred loan costs
Operating properties and equipment, net
Other
Total
$
$
534
534
534
534
534
1,153
3,823
December 31,
2018
December 31,
2017
$
$
31,983
12,376
845
2,424
54,198
3,425
105,251
$
$
13,040
16,012
2,569
3,427
10,528
2,494
48,070
Operating properties and equipment, net was impacted by our one-time cumulative adjustment resulting from the
adoption of ASC 606. As a result of our cumulative adjustment, the December 31, 2017 balance increased by $39.5 million on
January 1, 2018. For further details, see Note 1, Organization and Summary of Significant Accounting Policies.
- 89 -
10.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
Accrued payroll and related costs
Warranty reserves (Note 13)
Estimated cost for completion of real estate inventories
Customer deposits
Income tax liability to Weyerhaeuser
Accrued income taxes payable
Liability for uncertain tax positions
Accrued interest
Accrued insurance expense
Other tax liabilities
Other
Total
11.
Senior Notes and Unsecured Revolving Credit Facility
Senior Notes
Senior notes consisted of the following (in thousands):
4.375% Senior Notes due June 15, 2019
4.875% Senior Notes due July 1, 2021
5.875% Senior Notes due June 15, 2024
5.250% Senior Notes due June 1, 2027
Discount and deferred loan costs
Total
December 31,
2018
December 31,
2017
$
$
44,010
71,836
114,928
17,464
6,577
8,335
972
12,572
—
21,892
36,563
335,149
$
$
36,863
69,373
105,864
19,568
7,706
30,672
1,458
11,014
1,187
33,671
13,506
330,882
$
December 31,
2018
381,895
300,000
450,000
300,000
(21,091)
$ 1,410,804
$
December 31,
2017
450,000
300,000
450,000
300,000
(28,698)
$ 1,471,302
In June 2017, TRI Pointe Group issued $300.0 million aggregate principal amount of 5.250% Senior Notes due 2027
(the “2027 Notes”) at 100.00% of their aggregate principal amount. Net proceeds of this issuance were $296.3 million, after
debt issuance costs and discounts. The 2027 Notes mature on June 1, 2027 and interest is paid semiannually in arrears on June
1 and December 1 of each year until maturity, beginning on December 1, 2017.
In May 2016, TRI Pointe Group issued $300.0 million aggregate principal amount of 4.875% Senior Notes due 2021
(the “2021 Notes”) at 99.44% of their aggregate principal amount. Net proceeds of this issuance were $293.9 million, after
debt issuance costs and discounts. The 2021 Notes mature on July 1, 2021 and interest is paid semiannually in arrears on
January 1 and July 1.
TRI Pointe Group and its 100% owned subsidiary TRI Pointe Homes, Inc. ("TRI Pointe Homes") are co-issuers of the
4.375% Senior Notes due 2019 (the "2019 Notes") and the 5.875% Senior Notes due 2024 (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 from the offering were $861.3 million, after debt issuance costs and discounts. 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. During the year ended December 31, 2018 we repurchased and cancelled an aggregate principal
amount of $68.1 million of the 2019 Notes.
As of December 31, 2018 there was $14.6 million of capitalized debt financing costs, included in senior notes, net on our
consolidated balance sheet, that will amortize over the lives of the Senior Notes. Accrued interest related to the Senior Notes
was $11.5 million and $10.6 million as of December 31, 2018 and 2017, respectively.
Unsecured Revolving Credit Facility
On June 20, 2017, the Company modified its existing unsecured revolving credit facility (the “Credit Facility”) to
extend the maturity date by two years to May 18, 2021, while decreasing the total commitments under the Credit Facility
- 90 -
to $600 million from $625 million. In addition, the Credit Facility was modified to give the Company the option to make offers
to the lenders to extend the maturity date of the Credit Facility in twelve-month increments, subject to the satisfaction of certain
conditions. The Credit Facility contains a sublimit of $75.0 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 acquisition, 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 1.25% to 2.00%, depending on the Company’s leverage ratio. As of
December 31, 2018, we had no outstanding debt under the Credit Facility and $568.2 million of availability after considering
the borrowing base provisions and outstanding letters of credit. As of December 31, 2018 there was $2.4 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, 2021. Accrued interest related to the Credit Facility was $402,000 and
$426,000 as of December 31, 2018 and 2017, respectively.
At December 31, 2018 and 2017, we had outstanding letters of credit of $31.8 million and $7.7 million,
respectively. 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.
Interest Incurred
During the years ended December 31, 2018 and 2017, the Company incurred interest of $91.6 million and $84.3 million,
respectively, related to all notes payable and Senior Notes outstanding during the period. All interest incurred was capitalized to
inventory for the years ended December 31, 2018 and 2017, respectively. Included in interest incurred was amortization of
deferred financing and Senior Notes discount costs of $8.0 million and $7.6 million for the years ended December 31, 2018 and
2017, respectively. Accrued interest related to all outstanding debt at December 31, 2018 and 2017 was $12.6 million and
$11.0 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 December 31, 2018 and December 31,
2017.
12.
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
- 91 -
Fair Value of Financial Instruments
A summary of assets and liabilities at December 31, 2018 and 2017, related to our financial instruments, measured at fair
value on a recurring basis, is set forth below (in thousands):
Senior Notes (1)
__________
December 31, 2018
December 31, 2017
Hierarchy
Level 2
Book Value
$ 1,425,397
Fair Value
$ 1,308,826
Book Value
$ 1,491,229
Fair Value
$ 1,552,335
(1) The book value of the Senior Notes is net of discounts, excluding deferred loan costs of $14.6 million and $19.9
million as of December 31, 2018 and 2017, respectively. The estimated fair value of our Senior Notes at December 31,
2018 and 2017 is based on quoted market prices.
At December 31, 2018 and 2017, the carrying value of cash and cash equivalents, receivables, other assets, accounts
payable and accrued expenses and other liabilities approximated fair value due to their short-term nature and variable interest
rate terms.
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 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):
Real estate inventories (1)
Year Ended December 31, 2018
Year Ended December 31, 2017
Impairment
Charge
Fair Value
Net of
Impairment
Impairment
Charge
Fair Value
Net of
Impairment
$
— $
— $
854
$
12,950
(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.
13.
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,
environmental protection and financial services. 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. Legal reserves were $17.5 million and zero as of December 31, 2018 and 2017, respectively.
On April 3, 2017, Pardee Homes was named as a defendant in a lawsuit filed in San Diego County Superior Court by
Scripps Health (“Scripps”) related to the April 1989 sale by Pardee Homes of real property located in Carmel Valley, California
to Scripps pursuant to a purchase agreement dated December 18, 1987 (as amended, the “Purchase Agreement”). In March
2003, Scripps contacted Pardee Homes and alleged Pardee Homes had breached a covenant in the Purchase Agreement by
failing to record a restriction against the development of the surrounding property then owned by Pardee Homes for medical
office use. In November 2003, the parties entered into a tolling agreement, pursuant to which the parties agreed to toll any
applicable statutes of limitation from November 3, 2003 until the expiration of the agreement. The tolling agreement did not
revive any cause of action already time barred by a statute of limitation as of November 3, 2003. The tolling agreement was
terminated as of February 21, 2017. Pardee Homes became an indirect, wholly owned subsidiary of TRI Pointe on July 7, 2014
in connection with TRI Pointe’s acquisition of WRECO.
- 92 -
On May 18, 2018, Pardee Homes filed a motion for summary judgment in the action, which had a rescheduled hearing
date of September 28, 2018. At the hearing, the court denied the motion for summary judgment. On October 22, 2018, Pardee
Homes filed with an appellate court a writ of mandate appealing the trial court's denial of the motion for summary judgment,
which writ of mandate was denied by the appellate court. On January 30, 2019, Pardee Homes and Scripps entered into a
confidential settlement agreement and mutual general release pursuant to which Pardee Homes agreed to pay a settlement
amount of $17.5 million and Scripps agreed to dismiss the lawsuit with prejudice. The parties also agreed to mutual general
releases of all claims. On February 4, 2019, Pardee Homes paid the $17.5 million settlement amount to Scripps, and Scripps
filed a request for dismissal of the lawsuit on February 7, 2019, which was entered by the court on February 21, 2019. This
amount was included in accrued expenses and other liabilities on our consolidated balance sheet and in cost of land and lot
sales in our consolidated statements of operations as of and for the year ended December 31, 2018.
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 warranty and
construction defect-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.
Our warranty reserve and related estimated insurance recoveries are based on actuarial analysis that uses our historical
claim and expense data, as well as industry data to estimate these overall costs and related recoveries. Key assumptions used in
developing these estimates include claim frequencies, severities and resolution patterns, which can occur over an extended
period of time. These estimates are subject to variability due to the length of time between the delivery of a home to a
homebuyer and when a warranty or construction defect claim is made, and the ultimate resolution of such claim; uncertainties
regarding such claims relative to our markets and the types of product we build; and legal or regulatory actions and/or
interpretations, among other factors. Due to the degree of judgment involved and the potential for variability in these
underlying assumptions, our actual future costs could differ from those estimated. 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.
We also record expected recoveries from insurance carriers based on actual insurance claims made and actuarially
determined amounts that depend on various factors, including, the above-described reserve estimates, our insurance policy
coverage limits for the applicable policy years and historical recovery rates. Because of the inherent uncertainty and variability
in these assumptions, our actual insurance recoveries could differ significantly from amounts currently estimated. Outstanding
warranty insurance receivables were $37.6 million and $35.8 million as of December 31, 2018 and 2017, respectively.
Warranty insurance receivables are recorded in receivables on the accompanying consolidated balance sheet.
Warranty reserves consisted of the following (in thousands):
Warranty reserves, beginning of period
Warranty reserves accrued
Adjustments to pre-existing reserves(1)
Warranty expenditures
Warranty reserves, end of period
__________
Year Ended December 31,
2018
2017
2016
$
$
69,373
25,340
(4,286)
(18,591)
71,836
$
$
83,135
13,336
(9,354)
(17,744)
69,373
$
$
45,948
12,712
36,826
(12,351)
83,135
(1)
Included in this amount for 2016 is approximately $38.0 million of additional warranty liabilities estimated to be
covered by our insurance policies that were adjusted to present the warranty reserves and related estimated warranty
- 93 -
insurance receivable on a gross basis at December 31, 2016. Of the $38.0 million adjusted in 2016, approximately
$36.5 million related to prior year estimated warranty insurance recoveries.
Performance Bonds
We obtain surety bonds in the normal course of business with various municipalities and other government agencies to
secure completion of certain infrastructure improvements of our projects. As of December 31, 2018 and December 31, 2017,
the Company had outstanding surety bonds totaling $685.7 million and $627.1 million, respectively. As of December 31, 2018
and December 31, 2017, our estimated cost to complete obligations related to these surety bonds was $423.4 million and
$537.4 million, respectively. If any such performance bonds or letters of credit are called, we would be obligated to reimburse
the issuer of the performance bond or letter of credit. We do not believe that a material amount of any currently outstanding
performance bonds or letters of credit will be called. Performance bonds do not have stated expiration dates. Rather, we are
released from the performance bonds as the underlying performance is completed.
Operating Leases
Office Space, Buildings and Equipment
We lease certain property and equipment under non-cancelable operating leases. Office leases are for terms up to ten
years and generally provide renewal options for terms up to an additional five years. In most cases, we expect that, in the
normal course of business, leases that expire will be renewed or replaced by other leases. Equipment leases are typically for
terms of three to four years. The future minimum rental payments under operating leases, which primarily consist of office
leases having initial or remaining noncancellable lease terms in excess of one year, are as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
$
$
7,502
7,883
6,776
5,198
4,088
8,094
39,541
For the years ended December 31, 2018, 2017 and 2016, rental expense was $7.8 million, $6.9 million and $6.4 million,
respectively. Rental expense is included in general and administrative expenses on the consolidated statements of operations.
Ground Leases
In 1987, we obtained two 55-year ground leases of commercial property that provided for three renewal options of ten
years each and one 45-year renewal option. We exercised the three ten year extensions on one of these ground leases extending
the lease through 2071. The commercial buildings on these properties have been sold and the ground leases have been sublet to
the buyers.
For one of these leases, we are responsible for making lease payments to the land owner, and we collect sublease
payments from the buyers of the buildings. Our lease commitments under this ground lease, which extends through 2071, were
(in thousands):
2019
2020
2021
2022
2023
Thereafter
$
$
2,359
2,359
2,359
2,359
2,359
75,592
87,387
- 94 -
This ground lease has been subleased through 2041 to the buyers of the commercial buildings. Our lease commitments
through 2041 total $54.2 million as of December 31, 2018, and are fully offset by sublease receipts under the noncancellable
subleases.
For the second lease, the buyers of the buildings are responsible for making lease payments directly to the land owner.
However, we have guaranteed the performance of the buyers/lessees. As of December 31, 2018, guaranteed future payments on
the lease, which expires in 2041, were $12.5 million.
Purchase Obligations
In the ordinary course of business, we enter into land option contracts in order to procure lots for the construction of our
homes. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved
lots. These purchase contracts typically require a cash deposit and the purchase of properties under these contracts is generally
contingent upon satisfaction of certain requirements by the sellers, including obtaining applicable property and development
entitlements. We also utilize option contracts with land sellers and land banking arrangements as a method of acquiring land in
staged takedowns, to help us manage the financial and market risk associated with land holdings, and to reduce the use of funds
from our corporate financing sources. These option contracts and land banking arrangements generally require a non-
refundable deposit for the right to acquire land and lots over a specified period of time at pre-determined prices. We generally
have the right at our discretion, to terminate our obligations under both purchase contracts and option contracts by forfeiting
our cash deposit with no further financial responsibility to the land seller. In some cases, however, we may be contractually
obligated to complete development work even if we terminate the option to procure land or lots. As of December 31, 2018, we
had $71.9 million of non-refundable cash deposits pertaining to land option contracts and purchase contracts with an aggregate
remaining purchase price of approximately $741.2 million (net of deposits).
Our utilization of land option contracts and land banking arrangements is dependent on, among other things, the
availability of land sellers or land banking firms willing to enter into such option takedown arrangements, the availability of
capital to financial intermediaries to finance the development of optioned lots, general housing market conditions, and local
market dynamics. Options may be more difficult to procure from land sellers in strong housing markets and are more prevalent
in certain geographic regions.
14.
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 TRI Pointe in January 2013, amended with the approval of our stockholders in 2014 and 2015, and amended and restated in
2019. In addition, our board of directors amended the 2013 Incentive Plan in 2014 to prohibit repricing (other than in
connection with any equity restructuring or any change in capitalization) of outstanding options or stock appreciation rights
without stockholder approval. On February 21, 2019, our board of directors approved an amendment and restatement of the
2013 Incentive Plan. The 2013 Incentive Plan provides for the grant of equity-based awards, including options to purchase
shares of common stock, stock appreciation rights, bonus 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.
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 December 31, 2018 there were 6,455,011 shares
available for future grant under the 2013 Incentive Plan.
The following table presents compensation expense recognized related to all stock-based awards (in thousands):
Total stock-based compensation
Year Ended December 31,
2018
2017
2016
$
14,814
$
15,906
$
12,612
- 95 -
Stock-based compensation is charged to general and administrative expense on the accompanying consolidated
statements of operations. As of December 31, 2018, total unrecognized stock-based compensation related to all stock-based
awards was $16.9 million and the weighted average term over which the expense was expected to be recognized was 1.7 years.
Summary of Stock Option Activity
The following table presents a summary of stock option awards for the year ended December 31, 2018:
Options outstanding at December 31, 2017
Granted
Exercised
Forfeited
Options outstanding at December 31, 2018
Options exercisable at December 31, 2018
Options
1,154,658
—
$
(171,747) $
(29,006) $
$
953,905
$
953,905
14.16
—
12.05
12.73
14.58
14.58
Weighted
Average
Exercise
Price
Per Share
Weighted
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
(in thousands)
4,350
$
4.9
—
4.2
4.2
$
$
296
296
The intrinsic value of each stock option award outstanding or exercisable is the difference between the fair market value
of the Company's common stock at the end of the period and the exercise price of each stock option award to the extent it is
considered "in-the-money". A stock option award is considered to be "in-the-money" if the fair market value of the Company's
stock is greater than the exercise price of the stock option award. The aggregate intrinsic value of options outstanding and
options exercisable represents the value that would have been received by the holders of stock option awards had they
exercised their stock option award on the last trading day of the period and sold the underlying shares at the closing price on
that day. The total intrinsic value of stock option awards exercised during the years ended December 31, 2018, 2017 and 2016
was $873,000, $4.5 million and $324,000, respectively. There were no stock option awards granted during the years ended
December 31, 2018, 2017 and 2016.
Summary of Restricted Stock Unit Activity
The following table presents a summary of restricted stock units (“RSUs”) for the year ended December 31, 2018:
Nonvested RSUs at December 31, 2017
Granted
Vested
Forfeited
Nonvested RSUs at December 31, 2018
Restricted
Stock
Units
$
4,307,592
1,131,231
$
(1,102,727) $
(994,248) $
$
3,341,848
Weighted
Average
Grant Date
Fair Value
Per Share
9.80
15.77
12.47
9.40
11.05
$
$
Aggregate
Intrinsic
Value
(in thousands)
77,192
36,526
The total intrinsic value of restricted stock units that vested during the years ended December 31, 2018, 2017 and 2016
was $17.8 million, $8.8 million and $4.6 million, respectively. The total grant date fair value of restricted stock awards granted
during the years ended December 31, 2018, 2017 and 2016 were $15.8 million, $18.4 million and $21.8 million, respectively.
On February 27, 2017, the Company granted an aggregate of 990,279 time-vested RSUs to employees and officers. The
RSUs granted vest in equal installments annually on the anniversary of the grant date over a three year period. The fair value
of each RSU granted on February 27, 2017 was measured using a price of $12.10 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 February 27, 2017, the Company granted 257,851, 247,933 and 119,008 performance-based RSUs to the Company’s
Chief Executive Officer, President, and Chief Financial Officer, respectively. These performance-based RSUs are allocated in
equal parts to two separate performance metrics: (i) TSR, with vesting based on the Company’s TSR relative to its peer-group
homebuilders; and (ii) earnings per share. The vesting, if at all, of these performance-based RSUs may range
from 0% to 100% and will be based on the Company’s percentage attainment of specified threshold, target and maximum
- 96 -
performance goals. The performance period for these performance-based RSUs is January 1, 2017 to December 31, 2019. The
fair value of the performance-based RSUs related to the TSR metric was determined to be $6.16 per share based on a Monte
Carlo simulation. The fair value of the performance-based RSUs related to the earnings per share goal was measured using a
price of $12.10 per share, which was the closing stock price on the date of grant. Each award will be expensed over the
requisite service period.
On May 30, 2017, the Company granted an aggregate of 55,865 RSUs to the non-employee members of its board of
directors. These RSUs vest in their entirety on the day immediately prior to the Company's 2018 Annual Meeting of
Stockholders. The fair value of each RSU granted on May 30, 2017 was measured using a price of $12.53 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 February 15, 2018, the Compensation Committee of our Board of Directors certified the performance achieved with
respect to performance-based RSUs granted to the Company’s Chief Executive Officer, President, and Chief Financial Officer
in 2015 that resulted in the issuance of 197,898 shares of our common stock under the 2013 Incentive Plan. The vesting of
these performance-based RSUs are included in the table above. RSUs that were forfeited, as reflected in the table above, during
the year ended December 31, 2018 included performance-based RSUs and time-based RSUs that were forfeited for no
consideration.
On February 22, 2018, the Company granted 184,179, 177,095, and 85,005 performance-based RSUs to the Company’s
Chief Executive Officer, President, and Chief Financial Officer, respectively. These performance-based RSUs are allocated in
equal parts to two separate performance metrics: (i) TSR, with vesting based on the Company’s TSR relative to its peer-group
homebuilders; and (ii) earnings per share. The vesting, if at all, of these performance-based RSUs may range
from 0% to 100% and will be based on the Company’s percentage attainment of specified threshold, target and maximum
performance goals. The performance period for these performance-based RSUs is January 1, 2018 to December 31, 2020. The
fair value of the performance-based RSUs related to the TSR metric was determined to be $10.97 per share based on a Monte
Carlo simulation. The fair value of the performance-based RSUs related to the earnings per share goal was measured using a
price of $16.94 per share, which was the closing stock price on the date of grant. Each award will be expensed over the
requisite service period.
On April 30, 2018, the Company granted an aggregate of 40,910 RSUs to the non-employee members of its board of
directors. On July 23, 2018, the Company granted 6,677 RSUs to a non-employee member of its board of directors in
connection with such individual's appointment to the board of directors. These RSUs vest in their entirety on the day
immediately prior to the Company's 2019 Annual Meeting of Stockholders. The fair value of each RSU granted on April 30,
2018 and July 23, 2018 was measured using a price of $17.11 and $16.37 per share, respectively, 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 May 7, 2018 and February 22, 2018, the Company granted an aggregate of 4,258 and 633,107, respectively, of time-
vested RSUs to certain employees and officers. The RSUs granted vest in equal installments annually on the anniversary of the
grant date over a three year period. The fair value of each RSU granted on May 7, 2018 and February 22, 2018 was measured
using a price of $17.61 and $16.94 per share, respectively, 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 RSUs vest for employees, a portion of the shares awarded is generally withheld to cover employee tax withholdings.
As a result, the number of RSUs vested and the number of shares of TRI Pointe common stock issued will differ.
- 97 -
15.
Income Taxes
The provision for income tax attributable to income before income taxes consisted of (in thousands):
Current:
Federal
State
Total current taxes
Deferred:
Federal
State
Total deferred taxes
Total income tax expense
Year Ended December 31,
2018
2017
2016
$
$
70,098
10,941
81,039
(350)
9,863
9,513
90,552
$
$
95,814
8,961
104,775
37,151
10,341
47,492
152,267
$
$
90,387
8,744
99,131
5,749
1,214
6,963
106,094
The Company’s provision for income taxes was different from the amount computed by applying the statutory federal
income tax rate of 21% to the underlying income before income taxes as a result of the following (in thousands):
Taxes at the U.S. federal statutory rate
State income taxes, net of federal tax impact
Domestic production activities deduction
Non-deductible transaction costs
Change in valuation allowance
Tax Cuts and Jobs Act
Other, net
Total income tax expense
Effective income tax rate
Year Ended December 31,
2018
76,009
13,603
—
234
—
(740)
1,446
90,552
$
$
2017
118,936
10,712
(7,108)
541
3,256
21,961
3,969
152,267
$
$
2016
105,779
9,539
(5,037)
305
(4,038)
—
(454)
106,094
25.0%
44.8%
35.1%
$
$
- 98 -
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 basis, and for operating loss and tax credit
carryforwards. Deferred taxes consisted of the following at December 31, 2018 and 2017 (in thousands):
Deferred tax assets:
Impairment and other valuation reserves
Incentive compensation
Indirect costs capitalized
Net operating loss carryforwards (state)
State taxes
Other costs and expenses
Gross deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Interest capitalized
Basis difference in inventory
Fixed assets
Intangibles
Deferred financing costs
Other
Deferred tax liabilities
Net deferred tax assets
Year Ended
December 31,
2018
2017
37,573
5,946
20,348
18,702
2,275
10,848
95,692
(3,449)
92,243
(7,355)
(8,170)
(2,473)
(5,187)
(802)
(488)
(24,475)
67,768
$
$
40,438
5,851
19,574
25,172
2,181
11,354
104,570
(3,478)
101,092
(7,144)
(9,207)
(1,710)
(5,360)
(898)
(360)
(24,679)
76,413
$
$
On December 22, 2017, the Tax Cuts and Jobs Act (“the Act”) was enacted, reducing the U.S. federal corporate income
tax rate from 35% to 21%, among other changes. We applied the guidance in SAB 118 when accounting for the enactment-date
effects of the Act in 2017 and throughout 2018. At December 31, 2017, we had not completed our accounting for all the
enactment-date income tax effects of the Act under ASC 740, Income tax for the remeasurement of deferred tax assets and
liabilities and the grandfathering provisions related to performance - based executive compensation.
At December 31, 2018, we have now completed our accounting for all of the enactment-date income tax effects of the
Act. In the quarter ended December 31, 2017, the Company remeasured certain deferred tax assets and liabilities based on the
rates at which they were expected to reverse in the future (which was generally 21%) by recording a provisional amount of
$22.0 million. Upon further analysis of certain aspects of the Act and refinement of our calculations during the year ended
December 31, 2018, the Company recorded a benefit of $740,000 due to favorable provision to return adjustments upon filing
of the federal consolidated return.
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 more likely than not unrealizable under ASC 740. We are
required to establish a valuation allowance for any portion of the asset we conclude is more likely than not to be unrealizable.
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.
As of December 31, 2018, the Company had a state net operating loss carryforward of $283.3 million, which will expire
between 2028 and 2036. As of December 31, 2018 and 2017, we had a valuation allowance on our deferred tax assets of $3.4
million and $3.5 million, respectively. Our valuation allowance increased in 2017 due to a $13.2 million impairment of our
investment in a limited liability company joint venture for the entitlement and development of land located in a Los Angeles
County, California that was recorded in the fourth quarter of 2017. A valuation allowance was recorded against the deferred tax
asset related to this impairment due to the fact that the joint venture if disposed at its carrying value would result in a capital
loss, the realization of which is uncertain.
- 99 -
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.
Unrecognized tax benefits represent potential future obligations to taxing authorities if uncertain tax positions we have
taken on previously filed tax returns are not sustained. These amounts represent the gross amount of exposure in individual
jurisdictions and do not reflect any additional benefits expected to be realized if such positions were not sustained, such as
federal deduction that could be realized if an unrecognized state deduction was not sustained.
The Company files income tax returns in the U.S., including federal and multiple state and local jurisdictions. The
Company’s tax years 2015-2017 will remain open to examination by the federal and state authorities for three and four years,
respectively, from the date of utilization of any net operating loss or credit carryforwards.
The following table summarizes the activity related to the Company’s gross unrecognized tax benefits (in thousands):
Balance at beginning of year
Increase (decrease) related to prior year tax positions
Balance at end of year
Year Ended
December 31,
2018
2017
$
$
1,521
(507)
1,014
$
$
—
1,521
1,521
The Company classifies interest and penalties related to income taxes as part of income tax expense. The Company has
not recorded any tax expense for interest and penalties on uncertain tax positions during the years ended December 31, 2018,
2017 and 2016. The Company estimates that the uncertain tax positions, if reversed, would result in a tax benefit of
approximately $972,000.
16.
Related Party Transactions
We had no related party transactions for the years ended December 31, 2018 or 2017.
In May of 2016, we entered into an agreement with an affiliate of Starwood Capital Group, a then greater than 5%
holder of our common stock, to acquire 52 lots located in Azusa, California, for an aggregate purchase price of $18.4 million.
In October of 2016, we acquired 27 of these lots for a purchase price of $9.6 million. Our former Chairman of the Board is also
the Chairman and Chief Executive Officer of Starwood Capital Group. This acquisition was approved by our independent
directors. In January of 2015, TRI Pointe acquired 46 lots located in Castle Rock, Colorado, for a purchase price of
approximately $2.8 million from an entity managed by an affiliate of Starwood Capital Group. In August of 2016, we agreed to
purchase 257 additional lots for an aggregate purchase price of approximately $8.6 million. In October of 2016, we acquired
126 of these lots for a purchase price of $4.2 million. This acquisition was approved by our independent directors. As of March
27, 2017, Starwood Capital Group is no longer a related party.
- 100 -
17.
Supplemental Disclosure to Consolidated Statement of Cash Flow
The following are supplemental disclosures to the consolidated statements of cash flows (in thousands):
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized of $82,034, $77,193 and $53,028
Income taxes
Supplemental disclosures of noncash activities:
Accrued liabilities related to the purchase of operating properties
and equipment
Amortization of senior note discount capitalized to real estate
inventory
Amortization of deferred loan costs capitalized to real estate
inventory
Increase in other assets related to adoption of ASC 606
Effect of net consolidation and de-consolidation of variable
interest entities:
(Decrease) increase in consolidated real estate inventory
not owned
Decrease (increase) in noncontrolling interests
$
$
$
$
$
$
$
$
18.
Supplemental Guarantor Information
2021 Notes and 2027 Notes
Year Ended December 31,
2018
2017
2016
— $
$
102,149
— $
$
74,388
—
117,215
685
2,112
5,927
39,534
$
$
$
$
— $
1,828
2,048
5,578
$
$
— $
1,815
4,642
—
— $
— $
(17,485) $
$
17,485
(316)
316
On May 26, 2016, TRI Pointe Group issued the 2021 Notes. On June 5, 2017, TRI Pointe Group issued the 2027 Notes.
All of TRI Pointe Group’s 100% owned subsidiaries that are guarantors (each a “Guarantor” and, collectively, the
“Guarantors”) of the Credit Facility, including TRI Pointe Homes, are party to supplemental indentures pursuant to which they
jointly and severally guarantee TRI Pointe Group’s obligations with respect to the 2021 Notes and the 2027 Notes. Each
Guarantor of the 2021 Notes and the 2027 Notes is 100% owned by TRI Pointe Group, and all guarantees are full and
unconditional, subject to customary exceptions pursuant to the indentures governing the 2021 Notes and the 2027 Notes, as
described in the following paragraph. All of our non-Guarantor subsidiaries have nominal assets and operations and are
considered minor, as defined in Rule 3-10(h) of Regulation S-X. In addition, TRI Pointe Group has no independent assets or
operations, as defined in Rule 3-10(h) of Regulation S-X. There are no significant restrictions upon the ability of TRI Pointe
Group or any Guarantor to obtain funds from any of their respective wholly owned subsidiaries by dividend or loan. None of
the assets of our subsidiaries represent restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X.
A Guarantor of the 2021 Notes and the 2027 Notes shall be released from all of its obligations under its guarantee if (i)
all of the assets of the Guarantor have been sold; (ii) all of the equity interests of the Guarantor held by TRI Pointe Group or a
subsidiary thereof have been sold; (iii) the Guarantor merges with and into TRI Pointe Group or another Guarantor, with TRI
Pointe Group or such other Guarantor surviving the merger; (iv) the Guarantor is designated “unrestricted” for covenant
purposes; (v) the Guarantor ceases to guarantee any indebtedness of TRI Pointe Group or any other Guarantor which gave rise
to such Guarantor guaranteeing the 2021 Notes or the 2027 Notes; (vi) TRI Pointe Group exercises its legal defeasance or
covenant defeasance options; or (vii) all obligations under the applicable supplemental indenture are discharged.
2019 Notes and 2024 Notes
TRI Pointe Group and TRI Pointe Homes are co-issuers of the 2019 Notes and the 2024 Notes. All of the Guarantors
(other than TRI Pointe Homes) have entered into supplemental indentures pursuant to which they jointly and severally
guarantee the obligations of TRI Pointe Group and TRI Pointe Homes with respect to the 2019 Notes and the 2024 Notes.
Each Guarantor of the 2019 Notes and the 2024 Notes is 100% owned by TRI Pointe Group and TRI Pointe Homes, and all
guarantees are full and unconditional, subject to customary exceptions pursuant to the indentures governing the 2019 Notes and
the 2024 Notes, as described below.
A Guarantor of the 2019 Notes and the 2024 Notes shall be released from all of its obligations under its guarantee if (i)
all of the assets of the Guarantor have been sold; (ii) all of the equity interests of the Guarantor held by TRI Pointe or a
- 101 -
subsidiary thereof have been sold; (iii) the Guarantor merges with and into TRI Pointe or another Guarantor, with TRI Pointe or
such other Guarantor surviving the merger; (iv) the Guarantor is designated “unrestricted” for covenant purposes; (v) the
Guarantor ceases to guarantee any indebtedness of TRI Pointe or any other Guarantor which gave rise to such Guarantor
guaranteeing the 2019 Notes and 2024 Notes; (vi) TRI Pointe exercises its legal defeasance or covenant defeasance options; or
(vii) all obligations under the applicable indenture are discharged.
Presented below are the condensed consolidating balance sheets at December 31, 2018 and December 31, 2017,
condensed consolidating statements of operations for the full years ended December 31, 2018, 2017 and 2016, and condensed
consolidating statements of cash flows for the full years ended December 31, 2018, 2017 and 2016. Because TRI Pointe’s non-
Guarantor subsidiaries are considered minor, as defined in Rule 3-10(h) of Regulation S-X, the non-Guarantor subsidiaries’
information is not separately presented in the tables below, but is included with the Guarantors. Additionally, because TRI
Pointe Group has no independent assets or operations, as defined in Rule 3-10(h) of Regulation S-X, the condensed
consolidated financial information of TRI Pointe Group and TRI Pointe Homes, the co-issuers of the 2019 Notes and 2024
Notes, is presented together in the column titled “Issuer”.
Condensed Consolidating Balance Sheet (in thousands):
Assets
Cash and cash equivalents
Receivables
Intercompany receivables
Real estate inventories
Investments in unconsolidated entities
Goodwill and other intangible assets, net
Investments in subsidiaries
Deferred tax assets, net
Other assets
Total Assets
Liabilities
Accounts payable
Intercompany payables
Accrued expenses and other liabilities
Senior notes, net
Total Liabilities
Equity
Total stockholders’ equity
Noncontrolling interests
Total Equity
Total Liabilities and Equity
December 31, 2018
Issuer
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
TRI Pointe
Group, Inc.
$
148,129
$
129,567
$
— $
277,696
16,589
758,501
812,799
—
156,604
1,672,635
14,822
12,984
35,003
—
2,403,260
5,410
—
(758,501)
—
—
3,823
—
— (1,672,635)
—
52,946
92,267
51,592
—
3,216,059
5,410
160,427
—
67,768
$ 3,593,063
$ 2,722,276
—
105,251
$ (2,431,136) $ 3,884,203
$
13,433
$
67,880
$
— $
81,313
—
111,902
1,410,804
1,536,139
758,501
223,247
—
1,049,628
(758,501)
—
—
(758,501)
—
335,149
1,410,804
1,827,266
2,056,924
13
(1,672,635)
—
(1,672,635)
2,056,937
$ (2,431,136) $ 3,884,203
2,056,924
1,672,635
—
13
2,056,924
1,672,648
$ 3,593,063
$ 2,722,276
- 102 -
Condensed Consolidating Balance Sheet (in thousands):
December 31, 2017
Issuer
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
TRI Pointe
Group, Inc.
Assets
Cash and cash equivalents
Receivables
Intercompany receivables
Real estate inventories
Investments in unconsolidated entities
Goodwill and other intangible assets, net
Investments in subsidiaries
Deferred tax assets, net
Other assets
Total Assets
Liabilities
Accounts payable
Intercompany payables
Accrued expenses and other liabilities
Senior notes, net
Total Liabilities
Equity
Total stockholders’ equity
Noncontrolling interests
Total Equity
Total Liabilities and Equity
$
176,684
56,021
794,550
855,727
—
156,604
1,448,690
10,892
3,465
$ 3,502,633
$
106,230
69,579
—
2,249,826
5,870
4,357
65,521
44,605
$ 2,545,988
$
— $
—
(794,550)
—
—
—
— (1,448,690)
—
—
282,914
125,600
—
3,105,553
5,870
160,961
—
76,413
48,070
$ (2,243,240) $ 3,805,381
$
9,364
—
92,245
1,471,302
1,572,911
$
63,506
794,550
238,637
—
1,096,693
$
— $
(794,550)
—
—
(794,550)
72,870
—
330,882
1,471,302
1,875,054
1,929,722
—
1,929,722
$ 3,502,633
1,448,690
605
1,449,295
$ 2,545,988
(1,448,690)
—
(1,448,690)
1,929,722
605
1,930,327
$ (2,243,240) $ 3,805,381
- 103 -
Condensed Consolidating Statement of Operations (in thousands):
Homebuilding:
Home sales revenue
Land and lot sales revenue
Other operations revenue
Total revenues
Cost of home sales
Cost of land and lot sales
Other operations expense
Sales and marketing
General and administrative
Homebuilding income from operations
Equity in loss of unconsolidated entities
Other (loss) income, net
Homebuilding income before taxes
Financial Services:
Revenues
Expenses
Equity in income of unconsolidated entities
Financial services income before taxes
Income before taxes
Provision for income taxes
Equity of net income (loss) of subsidiaries
Net income (loss)
Net income attributable to noncontrolling interests
Net income (loss) available to common stockholders
Year Ended December 31, 2018
Issuer
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
TRI Pointe
Group, Inc.
$
$ 1,073,592
—
—
1,073,592
877,928
17,500
—
48,593
78,669
50,902
—
(623)
50,279
$ 2,170,495
8,758
8,164
2,187,417
1,658,971
7,935
3,174
138,674
76,361
302,302
(393)
204
302,113
— $ 3,244,087
8,758
—
8,164
—
3,261,009
—
2,536,899
—
25,435
—
3,174
—
187,267
—
155,030
—
353,204
—
(393)
—
(419)
—
352,392
—
—
—
—
—
50,279
(13,084)
232,716
269,911
—
269,911
$
1,738
582
8,517
9,673
311,786
(77,468)
—
234,318
(1,602)
232,716
$
—
—
—
—
—
—
(232,716)
(232,716)
—
$ (232,716) $
1,738
582
8,517
9,673
362,065
(90,552)
—
271,513
(1,602)
269,911
- 104 -
Condensed Consolidating Statement of Operations (in thousands):
Homebuilding:
Home sales revenue
Land and lot sales revenue
Other operations revenue
Total revenues
Cost of home sales
Cost of land and lot sales
Other operations expense
Sales and marketing
General and administrative
Homebuilding income from operations
Equity in loss of unconsolidated entities
Other income, net
Homebuilding income before taxes
Financial Services:
Revenues
Expenses
Equity in income of unconsolidated entities
Financial services income before taxes
Income before taxes
Provision for income taxes
Equity of net income (loss) of subsidiaries
Net income (loss)
Net income attributable to noncontrolling interests
Net income (loss) available to common stockholders
Year Ended December 31, 2017
Issuer
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
TRI Pointe
Group, Inc.
$
$
927,247
—
—
927,247
780,732
—
—
34,286
67,006
45,223
—
38
45,261
—
—
—
—
45,261
(22,501)
164,431
187,191
—
187,191
$ 1,805,052
74,269
2,333
1,881,654
1,392,519
14,888
2,298
102,780
70,758
298,411
(11,433)
113
287,091
1,371
331
6,426
7,466
294,557
(129,766)
—
164,791
(360)
164,431
$
$
— $ 2,732,299
74,269
—
2,333
—
2,808,901
—
2,173,251
—
14,888
—
2,298
—
137,066
—
137,764
—
343,634
—
(11,433)
—
151
—
332,352
—
—
—
—
—
—
—
(164,431)
(164,431)
—
$ (164,431) $
1,371
331
6,426
7,466
339,818
(152,267)
—
187,551
(360)
187,191
- 105 -
Condensed Consolidating Statement of Operations (in thousands):
Homebuilding:
Home sales revenue
Land and lot sales revenue
Other operations revenue
Total revenues
Cost of home sales
Cost of land and lot sales
Other operations expense
Sales and marketing
General and administrative
Homebuilding income from operations
Equity in income of unconsolidated entities
Other (loss) income, net
Homebuilding income before taxes
Financial Services:
Revenues
Expenses
Equity in income of unconsolidated entities
Financial services income before taxes
Income before taxes
Provision for income taxes
Equity of net income (loss) of subsidiaries
Net income (loss)
Net income attributable to noncontrolling interests
Net income (loss) available to common stockholders
Year Ended December 31, 2016
Issuer
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
TRI Pointe
Group, Inc.
$
$
723,186
—
—
723,186
607,316
—
—
29,092
59,327
27,451
—
149
27,600
—
—
—
—
27,600
(11,322)
178,893
195,171
—
195,171
$ 1,606,150
72,272
2,314
1,680,736
1,229,011
17,367
2,247
98,811
64,792
268,508
179
163
268,850
1,220
253
4,810
5,777
274,627
(94,772)
—
179,855
(962)
178,893
$
$
— $ 2,329,336
72,272
—
2,314
—
2,403,922
—
1,836,327
—
17,367
—
2,247
—
127,903
—
124,119
—
295,959
—
179
—
312
—
296,450
—
—
—
—
—
—
—
(178,893)
(178,893)
—
$ (178,893) $
1,220
253
4,810
5,777
302,227
(106,094)
—
196,133
(962)
195,171
- 106 -
Condensed Consolidating Statement of Cash Flows (in thousands):
Cash flows from operating activities:
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from sale of property and equipment
Investments in unconsolidated entities
Intercompany
Net cash paid for acquisition
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Borrowings from debt
Repayment of debt
Debt issuance costs
Distributions to noncontrolling interests
Proceeds from issuance of common stock under share-
based awards
Minimum tax withholding paid on behalf of employees
for share-based awards
Share repurchases
Intercompany
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents - beginning of year
Year Ended December 31, 2018
Issuer
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
TRI Pointe
Group, Inc.
$
156,976
$
153,686
$
— $
310,662
(8,038)
—
—
40,781
—
32,743
125,000
(193,105)
—
—
(23,613)
8
(2,274)
—
(61,495)
(87,374)
—
—
—
(2,194)
1,943
—
(6,049)
(146,063)
—
(218,274)
(28,555)
176,684
—
—
(40,781)
(42,975)
23,337
106,230
—
—
—
(40,781)
—
(40,781)
—
—
—
—
—
—
—
40,781
40,781
—
—
(31,651)
8
(2,274)
—
(61,495)
(95,412)
125,000
(193,105)
—
(2,194)
1,943
(6,049)
(146,063)
—
(220,468)
(5,218)
282,914
Cash and cash equivalents - end of year
$
148,129
$
129,567
$
— $
277,696
- 107 -
Condensed Consolidating Statement of Cash Flows (in thousands):
Year Ended December 31, 2017
Issuer
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
TRI Pointe
Group, Inc.
$
73,208
$
28,466
$
— $
101,674
—
—
—
14,163
14,163
—
—
—
—
—
—
—
(14,163)
(14,163)
—
—
(2,605)
6
(980)
—
(3,579)
500,000
(413,726)
(5,957)
(1,333)
12,291
(2,896)
(112,217)
—
(23,838)
74,257
208,657
Cash flows from operating activities:
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from sale of property and equipment
Investments in unconsolidated entities
Intercompany
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Borrowings from debt
Repayment of debt
Debt issuance costs
(1,424)
—
—
(14,163)
(15,587)
500,000
(413,726)
(5,957)
(1,181)
6
(980)
—
(2,155)
—
—
—
Distributions to noncontrolling interests
—
(1,333)
Proceeds from issuance of common stock under share-based
awards
Minimum tax withholding paid on behalf of employees for
share-based awards
Share repurchases
Intercompany
Net cash (used in) provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents - beginning of year
12,291
(2,896)
(112,217)
—
(22,505)
35,116
141,568
—
—
—
14,163
12,830
39,141
67,089
Cash and cash equivalents - end of year
$
176,684
$
106,230
$
— $
282,914
- 108 -
Condensed Consolidating Statement of Cash Flows (in thousands):
Cash flows from operating activities:
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from sale of property and equipment
Investments in unconsolidated entities
Intercompany
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Borrowings from debt
Repayment of debt
Debt issuance costs
Repayment of debt payable to Weyerhaeuser
Decrease in book overdrafts
Distributions to Weyerhaeuser
Proceeds from issuance of common stock under share-based
awards
Minimum tax withholding paid on behalf of employees for
share-based awards
Share repurchases
Intercompany
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents - beginning of year
Year Ended December 31, 2016
Issuer
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
TRI Pointe
Group, Inc.
$
(179,397) $
21,087
$
— $
(158,310)
(1,603)
—
—
12,102
10,499
541,069
(330,458)
(5,062)
—
—
—
587
(1,359)
(42,082)
—
162,695
(6,203)
147,771
(2,382)
9
(32)
—
(2,405)
—
(400)
—
(2,442)
1,955
(5,318)
—
—
—
(12,102)
(18,307)
375
66,714
—
—
—
(12,102)
(12,102)
—
—
—
—
—
—
—
—
—
12,102
12,102
—
—
(3,985)
9
(32)
—
(4,008)
541,069
(330,858)
(5,062)
(2,442)
1,955
(5,318)
587
(1,359)
(42,082)
—
156,490
(5,828)
214,485
Cash and cash equivalents - end of year
$
141,568
$
67,089
$
— $
208,657
- 109 -
19.
Results of Quarterly Operations (Unaudited)
The following table presents our unaudited quarterly financial data (in thousands, except per share amounts).
2018
Total revenues(1)
Cost of homes sales and other(2)
Gross margin
Net income
Net income attributable to noncontrolling interests
Net income available to common stockholders
Earnings per share
Basic
Diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
$
$
$
583,676
451,607
132,069
42,880
—
42,880
0.28
0.28
$
$
$
$
$
$
771,303
606,111
165,192
63,680
—
63,680
0.42
0.42
$
$
$
$
$
$
775,071
$ 1,132,697
609,877
165,194
63,969
—
63,969
0.43
0.43
$
$
$
$
$
897,913
234,784
100,984
(1,602)
99,382
0.70
0.70
__________
(1) Total revenues includes total homebuilding revenues and financial services revenue.
(2) Cost of homes sales and other includes cost of homes sales, cost of land and lot sales, and other operations expense.
2017
Total revenues(1)
Cost of homes sales and other(2)
Gross margin
Net income
Net income attributable to noncontrolling interests
Net income available to common stockholders
Earnings per share
Basic
Diluted
First
Quarter
Second
Quarter
Third
Quarter
$
$
$
$
$
$
393,391
319,618
73,773
8,217
(24)
8,193
0.05
0.05
$
$
$
$
$
$
570,626
455,476
115,150
32,803
(89)
32,714
0.21
0.21
$
$
$
$
$
$
Fourth
Quarter
$ 1,128,520
880,849
247,671
74,242
(222)
74,020
$
$
$
717,735
534,494
183,241
72,289
(25)
72,264
0.48
0.48
$
$
0.49
0.49
__________
(1) Total revenues includes total homebuilding revenues and financial services revenue.
(2) Cost of homes sales and other includes cost of homes sales, cost of land and lot sales, and other operations expense.
Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share
amounts for the quarter may not agree with per share amounts for the year.
- 110 -
Item 16.
Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TRI Pointe Group, Inc.
By:
/s/ Douglas F. Bauer
Douglas F. Bauer
Chief Executive Officer
Date: February 26, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Steven J. Gilbert
Steven J. Gilbert
/s/ Douglas F. Bauer
Douglas F. Bauer
/s/ Michael D. Grubbs
Michael D. Grubbs
/s/ Glenn J. Keeler
Glenn J. Keeler
/s/ Lawrence B. Burrows
Lawrence B. Burrows
/s/ Daniel S. Fulton
Daniel S. Fulton
/s/ Constance B. Moore
Constance B. Moore
/s/ Vicki D. McWilliams
Vicki D. McWilliams
/s/ Thomas B. Rogers
Thomas B. Rogers
Chairman of the Board, Director
February 26, 2019
Chief Executive Officer and Director (Principal
February 26, 2019
Executive Officer)
Chief Financial Officer & Treasurer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
- 111 -
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
Exhibit
Number
2.1
Transaction Agreement, dated as of November 3, 2013, among TRI Pointe Homes, Inc., Weyerhaeuser
Company, Weyerhaeuser Real Estate Company, and Topaz Acquisition, Inc. (incorporated by reference to
Exhibit
Description
3.1
Amended and Restated Certificate of Incorporation of TRI Pointe Group, Inc. (incorporated by reference to
3.2
4.1
4.2
Amended and Restated Bylaws of TRI Pointe Group, Inc. (incorporated by reference to Exhibit 3.1 to the
Company’s Current Report on Form 8-K (filed October 27, 2016))
Specimen Common Stock Certificate of TRI Pointe Group, Inc. (incorporated by reference to Exhibit 4.1 to
the Company’s Current Report on Form 8-K (filed July 7, 2015))
Registration Rights Agreement, dated as of January 30, 2013, among TRI Pointe Homes, Inc., VIII/TPC
Holdings, L.L.C., and certain TRI Pointe Homes, Inc. stockholders (incorporated by reference to Exhibit 4.4
4.3
First Amendment to Registration Rights Agreement, dated as of July 7, 2015, among TRI Pointe Group, Inc.,
TRI Pointe Homes, Inc., VIII/TPC Holdings, L.L.C. and certain TRI Pointe Homes, Inc. stockholders
2015))
4.4
Indenture, dated as of June 13, 2014, by and among Weyerhaeuser Real Estate Company and U.S. Bank
National Association, as trustee (including form of 4.375% Senior Note due 2019) (incorporated by reference
4.5
First Supplemental Indenture, dated as of July 7, 2014, among TRI Pointe Homes, Inc., Weyerhaeuser Real
Estate Company and U.S. Bank National Association, as trustee, relating to the 4.375% Senior Notes due
2014))
4.6
Second Supplemental Indenture, dated as of July 7, 2014, among the guarantors party thereto and U.S. Bank
National Association, as trustee, relating to the 4.375% Senior Notes due 2019 (incorporated by reference to
4.7
Third Supplemental Indenture, dated as of July 7, 2015, among TRI Pointe Group, Inc., TRI Pointe Homes,
Inc. and U.S. Bank National Association, as trustee, relating to the 4.375% Senior Notes due 2019
4.8
Indenture, dated as of June 13, 2014, by and among Weyerhaeuser Real Estate Company and U.S. Bank
National Association, as trustee (including form of 5.875% Senior Note due 2024) (incorporated by reference
4.9
First Supplemental Indenture, dated as of July 7, 2014, among TRI Pointe Homes, Inc., Weyerhaeuser Real
Estate Company and U.S. Bank National Association, as trustee, relating to the 5.875% Senior Notes due
2014))
4.10
Second Supplemental Indenture, dated as of July 7, 2014, among the guarantors party thereto and U.S. Bank
National Association, as trustee, relating to the 5.875% Senior Notes due 2024 (incorporated by reference to
4.11
Third Supplemental Indenture, dated as of July 7, 2015, among TRI Pointe Group, Inc., TRI Pointe Homes,
Inc. and U.S. Bank National Association, as trustee, relating to the 5.875% Senior Notes due 2024
4.12
Indenture, dated as of May 23, 2016, by and between TRI Pointe Group, Inc. and U.S. Bank National
Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on
Form S-3ASR (filed May 23, 2016))
- 112 -
Exhibit
Number
4.13
Exhibit
Description
First Supplemental Indenture, dated as of May 26, 2016, among TRI Pointe Group, Inc., the guarantors party
thereto and U.S. Bank National Association, as trustee, relating to the 4.875% Senior Notes due 2021
(incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (filed May 26,
2016))
4.14
Second Supplemental Indenture, dated as of June 8, 2017, among the guarantors party thereto and U.S. Bank
National Association, as trustee, relating to the 5.250% Senior Notes due 2027 (incorporated by reference to
4.15
Form of 4.875% Senior Note due 2021 (incorporated by reference to Exhibit 4.2 to the Company’s Current
4.16
Form of 5.25% Senior Note due 2027 (incorporated by reference to Exhibit 4.2 to the Company’s Current
10.1
Registration Rights Agreement with respect to 4.375% Senior Notes due 2019, dated as of June 23, 2014, by
and among Weyerhaeuser Real Estate Company, CitiGroup Global Markets, Inc. and Deutsche Bank
Securities Inc., as representatives of the Initial Purchasers (incorporated by reference to Exhibit 10.1 to the
10.2
Registration Rights Agreement with respect to 5.875% Senior Notes due 2024, dated as of June 13, 2014, by
and among Weyerhaeuser Real Estate Company, CitiGroup Global Markets, Inc. and Deutsche Bank
Securities Inc., as representatives of the Initial Purchasers (incorporated by reference to Exhibit 10.2 to the
10.3
Issuer Joinder Agreement to Registration Rights Agreement, dated as of July 7, 2014, relating to 4.375%
Senior Notes due 2019 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form
10.4
Guarantor Joinder Agreement to Registration Rights Agreement, dated as of July 7, 2014, relating to 4.375%
Senior Notes due 2019 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form
10.5
Issuer Joinder Agreement to Registration Rights Agreement, dated as of July 7, 2014, relating to 5.875%
Senior Notes due 2024 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form
10.6
Guarantor Joinder Agreement to Registration Rights Agreement, dated as of July 7, 2014, relating to 5.875%
Senior Notes due 2024 (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form
10.7
Tax Sharing Agreement, dated as of July 7, 2014, among Weyerhaeuser Company, Weyerhaeuser Real Estate
Company, and TRI Pointe Homes, Inc. (incorporated by reference to Exhibit 10.6 to the Company’s Current
10.8
First Amendment to Tax Sharing Agreement, dated as of July 7, 2015, among TRI Pointe Group, Inc., TRI
Pointe Homes, Inc., TRI Pointe Holdings, Inc. (f/k/a Weyerhaeuser Real Estate Company) and Weyerhaeuser
July 7, 2015))
10.9
Amended and Restated Credit Agreement, dated as of July 7, 2015, among TRI Pointe Group, Inc., U.S.
Bank National Association and the lenders party thereto (incorporated by reference to Exhibit 4.4 to the
10.10
10.11†
Modification Agreement dated as of June 20, 2017, by and among TRI Pointe Group, Inc., U.S. Bank
National Association and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K (filed June 20, 2017))
Weyerhaeuser Real Estate Company 2004 Long-Term Incentive Plan (filed as Exhibit 99.1 to the Company’s
Registration Statement on Form S-8 (filed July 16, 2014))
- 113 -
Exhibit
Description
Weyerhaeuser Real Estate Company 2013 Long-Term Incentive Plan (filed as Exhibit 99.2 to the Company’s
Registration Statement on Form S-8 (filed July 16, 2014))
Exhibit
Number
10.12†
10.13†
10.14†
Amendment No. 1 to 2013 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the
10.15†
Amendment No. 2 to 2013 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the
10.16†
Omnibus Amendment to the TRI Pointe Homes, Inc. 2013 Long-Term Incentive Plan, TRI Pointe Group
Short-Term Incentive Plan, Weyerhaeuser Real Estate Company 2004 Long-Term Incentive Plan and the
Weyerhaeuser Real Estate Company 2013 Long-Term Incentive Plan and their related stock option, restricted
stock unit, cash incentive award agreements and performance share unit agreements, dated as of July 7, 2015
2015))
10.17†
Amendment No. 4 to TRI Pointe Homes, Inc. 2013 Long-Term Incentive Plan (incorporated by reference to
10.18†
Executive Employment Agreement dated as of November 19, 2015 between TRI Pointe Group, Inc. and
(filed November 20, 2015))
10.19†
Executive Employment Agreement dated as of November 19, 2015 between TRI Pointe Group, Inc. and
(filed November 20, 2015))
10.20†
Executive Employment Agreement dated as of November 19, 2015 between TRI Pointe Group, Inc. and
(filed November 20, 2015))
10.21†
Form of Indemnification Agreement between TRI Pointe Homes, Inc. and each of its directors and officers
Dec. 21, 2012))
10.22†
Form of Amendment to Indemnification Agreement between TRI Pointe Group, Inc. and each of its directors
July 7, 2015))
10.23†
10.24†
10.25†
10.26†
10.27†
10.28†
Form of Performance-Based Cash Award Agreement. (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K (filed February 28, 2017))
Form of Performance-Based Restricted Stock Unit Award Agreement (total shareholder return) (incorporated
by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (filed February 28, 2017))
Form of Performance-Based Restricted Stock Unit Award Agreement (earnings per share) (incorporated by
reference to Exhibit 10.3 to the Company's Current Report on Form 8-K (filed February 28, 2017))
Form of Time-Vested Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.4 to
the Company's Current Report on Form 8-K (filed February 28, 2017))
- 114 -
Exhibit
Number
10.29†
10.30†
10.31†
10.32†
10.33†
10.34†
10.35†
10.36†
10.37†
10.38†
10.39†
10.40†
10.41†
Exhibit
Description
Form of Time-Vested Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.3 to
the Company's Current Report on Form 8-K (filed March 2, 2016))
Form of Performance-Based Restricted Stock Unit Award Agreement (total shareholder return) (incorporated
by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (filed March 2, 2016))
Form of Performance-Based Restricted Stock Unit Award Agreement (total shareholder return) (incorporated
by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (filed March 11, 2015))
Form of Performance-Based Restricted Stock Unit Award Agreement (earnings per share) (incorporated by
reference to Exhibit 10.3 to the Company's Current Report on Form 8-K (filed March 11, 2015))
Form of Performance-Based Restricted Stock Unit Award Agreement (stock price) (incorporated by reference
to Exhibit 10.4 to the Company's Current Report on Form 8-K (filed March 11, 2015))
Form of Severance and Change in Control Protection Agreement (incorporated by reference to Exhibit 10.4
to the Company’s Current Report on Form 8-K (filed March 2, 2016))
Amended and Restated 2013 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K (filed February 26, 2019))
Form of Non-Employee Director Restricted Stock Unit Award Agreement (incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K (filed February 26, 2019))
Form of Time-Vested Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.3 to
the Company’s Current Report on Form 8-K (filed February 26, 2019))
Form of Time-Vested Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.4 to
the Company’s Current Report on Form 8-K (filed February 26, 2019))
Form of Performance-Based Cash Award Agreement (incorporated by reference to Exhibit 10.5 to the
Company’s Current Report on Form 8-K (filed February 26, 2019))
Form of Performance-Based Restricted Stock Unit Award Agreement (earnings per share) (incorporated by
reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K (filed February 26, 2019))
Form of Performance-Based Restricted Stock Unit Award Agreement (total stockholder return) (incorporated
by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K (filed February 26, 2019))
21.1
List of subsidiaries of TRI Pointe Group, Inc.
23.1
Consent of Independent Registered Public Accounting Firm
31.1
31.2
32.1
32.2
101
December 31, 2018, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated
Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive
Income, (iv) Consolidated Statement of Cash Flows, and (v) Notes to Consolidated Financial Statement.
†
Management Contract or Compensatory Plan or Arrangement
- 115 -
[This Page Intentionally Left Blank]
[This Page Intentionally Left Blank]
[This Page Intentionally Left Blank]
D I R E C T O R S
Steven J. Gilbert
Chairman of the Board
Douglas F. Bauer
Chief Executive Officer
Lawrence B. Burrows
Daniel S. Fulton
Vicki D. McWilliams
Constance B. Moore
Thomas B. Rogers
E X E C U T I V E O F F I C E R S
Douglas F. Bauer
Chief Executive Officer
Thomas J. Mitchell
President and Chief Operating Officer
Michael D. Grubbs
Chief Financial Officer
David C. Lee
VP, General Counsel and Secretary
Glenn J. Keeler
VP and Chief Accounting Officer
C o r p o r a t e O f f i c e :
19540 Jamboree Road
Suite 300, Irvine, CA 92612
Website: www.TriPointeGroup.com
NYSE Ticker Symbol: TPH
F o r m s 1 0 - K a n d
G o v e r n a n c e M a t e r i a l s :
Our annual report on Form 10-K (excluding
exhibits), our board committee charters, our
code of ethics and our corporate governance
guidelines are available on our website, and
stockholders may request printed copies
(which will be provided free of charge) from:
I n v e s t o r R e l a t i o n s :
Tel: (949) 478-8696
Email: InvestorRelations@TriPointeGroup.com
www.TriPointeGroup.com
The SEC also maintains a website that contains
reports, proxy information and statements,
and other information regarding registrants who
file electronically with the SEC. The website
address is www.sec.gov.
Annual Meeting Date:
Tuesday, April 30, 2019
10:00 am (Eastern Time)
Four Seasons Hotel New York Downtown
27 Barclay Street
New York, NY 10007
Independent Registered Public Accounting Firm:
Ernst & Young LLP
Irvine, CA
Transfer Agent and Registrar:
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
www.astfinancial.com
Tel: 800-937-5449
Email: info@astfinancial.com
7
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