NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Description of the Business — Taylor Morrison Home Corporation (“TMHC”), through its subsidiaries (together with TMHC referred to herein as “we,” “our,” “the Company” and “us”), owns and operates a residential homebuilding business and is a developer of lifestyle communities. We operate in the states of Arizona, California, Colorado, Florida, Georgia, Nevada, North and South Carolina, Oregon, Texas, and Washington. Our Company serves a wide array of consumer groups from coast to coast, including entry-level, move-up, and active adult. Our homebuilding segments operate under our Taylor Morrison, Darling Homes, and William Lyon Signature brand names. Our business is organized into multiple homebuilding operating components, and a financial services component, all of which are managed as four reportable segments: East, Central, West, and Financial Services. The communities in our homebuilding segments generally offer single and multi-family attached and detached homes. We are the general contractors for all real estate projects and retain subcontractors for home construction and land development. We also have an exclusive partnership with Christopher Todd Communities, a growing Phoenix-based developer of innovative, luxury rental communities to operate a “Build-to-Rent” homebuilding business. We serve as a land acquirer, developer, and homebuilder while Christopher Todd Communities provides community design and property management consultation. As part of our acquisition of William Lyon Homes (“WLH”), discussed below, we also acquired Urban Form Development, LLC (“Urban Form”), which primarily develops and constructs multi-use properties consisting of commercial space, retail, and multi-family properties. Our Financial Services segment provides financial services to customers through our wholly owned mortgage subsidiary, operating as Taylor Morrison Home Funding, INC (“TMHF”), title services through our wholly owned title services subsidiary, Inspired Title Services, LLC (“Inspired Title”), and homeowner’s insurance policies through our insurance agency, Taylor Morrison Insurance Services, LLC (“TMIS”).
On February 6, 2020, we completed the acquisition of WLH, one of the largest homebuilders in the Western United States. WLH designs, constructs, markets and sells single-family detached and attached homes in California, Arizona, Nevada, Colorado, Washington, Oregon, and Texas. Refer to Note 3 - Business Combinations for additional information.
The COVID-19 pandemic has had a widespread effect on national and global economies, and the United States continues to be challenged with cases. Residential construction has been designated as an essential business in nearly all of our operating markets, and therefore our construction operations continued during the year, despite certain shelter-in-place orders. However, all of our operations have been conducted in compliance with federal, state, and local COVID-19 guidelines, orders, and ordinances applicable to construction and homebuilding activities. Despite the negative impacts of COVID-19, our leadership team created a strategic plan which allowed us to thrive under the restrictive environment. Specifically, we focused on transforming our customer experience online through innovative digital options, including (i) shifting to a remote selling environment; (ii) providing virtual options for online home tours, design center selections and new home demonstrations; and (iii) offering “curbside” or “drive thru” closings nationwide. In addition, we enhanced our website to further include a state-of-the-art customized chatbot to help provide information, engage the shopper and capture the customer, along with online appointments including home reservations that allow shoppers to reserve an inventory home online. While many of these new online features were already in process, the need for such customer convenience was expedited as a result of the pandemic.
Organization of the Business — As a result of the completion of our initial public offering (“IPO”) on April 12, 2013 and a series of transactions pursuant to a Reorganization Agreement dated as of April 9, 2013, TMHC was formed and became the owner and general partner of TMM Holdings II Limited Partnership (“New TMM”), a direct subsidiary. New TMM was formed by a consortium of investors (the “Former Principal Equityholders”). From January 2017 through January 2018, we completed seven public offerings for an aggregate of 80.2 million shares of our Common Stock, using all of the net proceeds therefrom to repurchase our Former Principal Equityholders' indirect interest in TMHC. As a result of the series of offerings and repurchases, the Former Principal Equityholders ownership decreased to zero, resulting in a fully floated public company by January 31, 2018.
In order to simplify our corporate structure, on October 26, 2018, Taylor Morrison Home II Corporation, a Delaware corporation formerly known as Taylor Morrison Home Corporation (“Original Taylor Morrison”), completed a holding company reorganization (the “Reorganization”), which resulted in a new parent company (“New Taylor Morrison”) owning all of the outstanding common stock of Original Taylor Morrison. New Taylor Morrison assumed the name Taylor Morrison Home Corporation and became the successor to Original Taylor Morrison.
In connection with the Reorganization and the Contribution Agreement among the Company, Original Taylor Morrison and the holders of Original Taylor Morrison’s Class B common stock (the “Class B Common Stock”) and paired TMM II Units party
thereto (the “Paired Interest Holders”), following the consummation of the Reorganization, each Paired Interest Holder contributed its partnership units (“TMM II Units”) of TMM Holdings II Limited Partnership, the principal subsidiary of the Company and Original Taylor Morrison (“TMM II”), and paired shares of the Company’s Class B Common Stock to the Company in exchange (the “Exchange”), on a one-for-one basis, for shares of the Company’s Class A Common Stock (the “
Class A Common Stock”). As a result of the Exchange, TMM II became an indirect wholly owned subsidiary of the Company. All of the Class B shares were cancelled following the Exchange. Therefore, the Company has only one class of common stock outstanding. Subsequently, the Class A Common Stock was renamed the Common Stock. References to "Common Stock" refer to “Class A Common Stock” for dates prior to June 10, 2019.
In addition, in connection with the Reorganization, all assets remaining in our Canadian subsidiary were contributed to a subsidiary in the United States (“Canada Unwind”). As a result, the previously unrecognized accumulated other comprehensive loss on foreign currency translation was recognized. In addition, we recognized non-resident Canadian withholding taxes. Excluding taxes, all costs associated with the corporate reorganization and Canada Unwind are presented as a component of Transaction and corporate reorganization expenses on the Consolidated Statement of Operations for the year ended December 31, 2018.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation — The accompanying Consolidated Financial Statements have been prepared in accordance with GAAP, include the accounts of TMHC and its consolidated subsidiaries, other entities where we have a controlling financial interest, and certain consolidated variable interest entities. Intercompany balances and transactions have been eliminated in consolidation.
Non-controlling interests - Former Principal Equityholders— During the first quarter of 2018, we completed multiple offerings of our Common Stock in registered public offerings and used all of the net proceeds from the public offerings to purchase partnership units in New TMM (“New TMM Units”) along with shares of our former Class B Common Stock, held by our Former Principal Equityholders. In addition on October 26, 2018, in connection with our reorganization transactions, all Class B common shares were converted to Class A common shares and subsequently retired. The percentage of the Former Principal Equityholders net income is presented as “Net income attributable to non-controlling interests - Former Principal Equityholders” on the Consolidated Statements of Operations.
Non-controlling interests - Joint Ventures — We consolidate certain joint ventures in accordance with ASC Topic 810, Consolidation. The income from the percentage of the joint venture not owned by us is presented as “Net income attributable to non-controlling interests - joint ventures” on the Consolidated Statements of Operations.
Business Combinations — Acquisitions are accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805-10, Business Combinations. In connection with our 2020 and 2018 acquisitions of WLH and AV Homes, Inc (“AV Homes”), respectively, we determined we obtained control of a business and inputs, processes and outputs in exchange for cash and equity consideration. All material assets and liabilities were measured and recognized at fair value as of the date of the acquisition to reflect the purchase price paid, which resulted in goodwill. Refer to Note 3 - Business Combinations for further information regarding the purchase price allocation and related acquisition accounting.
For the year ended December 31, 2020, we recognized $127.2 million of costs relating to the acquisition of WLH which consisted primarily of investment banking fees, severance, compensation, legal fees, expenses relating to credit facility paydowns and terminations, and other various integration costs. For the year ended December 31, 2019, we recognized an aggregate $10.7 million of costs relating to the acquisition of WLH and prior acquisition of AV Homes, which primarily consisted of legal fees, compensation and other miscellaneous expenses. For the year ended December 31, 2018, we recognized $30.8 million of costs relating to our AV Homes acquisition which primarily consisted of investment banking fees, severance, compensation, legal fees and other various integration costs. Such charges have been recognized in Transaction and corporate reorganization expenses on the Consolidated Statements of Operations.
Use of Estimates — The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates include real estate development costs to complete, valuation of real estate, valuation of acquired assets, valuation of goodwill, valuation of development liabilities, valuation of equity awards, valuation allowance on deferred tax assets and reserves for warranty and self-insured risks. Actual results could differ from those estimates.
Concentration of Credit Risk — Financial instruments that potentially subject us to concentrations of credit risk are primarily cash and cash equivalents and mortgage borrowings. Cash and cash equivalents include amounts on deposit with financial institutions in the U.S. that are in excess of the Federal Deposit Insurance Corporation federally insured limits of up to $250,000. Of the different types of mortgage receivables, the concentration between any one customer was below 50% as of the year ended December 31, 2020. No losses have been experienced to date.
In addition, the Company is exposed to credit risk to the extent that borrowers may fail to meet their contractual obligations. This risk is mitigated by collateralizing the property sold to the buyer with a mortgage, and entering into forward commitments to sell our mortgage loans held for sale, generally within 30 days of origination.
Cash and Cash Equivalents — Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions, and investments with original maturities of 90 days or less. At December 31, 2020, the majority of our cash and cash equivalents were invested in both highly liquid and high-quality money market funds or on deposit with major financial institutions.
Restricted Cash — For the years ended December 31, 2020 and 2019 restricted cash consisted of cash pledged to collateralize mortgage credit lines and cash held in escrow deposits.
Leases — We adopted ASC Topic 842, Leases, as amended, on January 1, 2019, using the modified retrospective approach. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. We also elected the hindsight practical expedient to determine the lease term for existing leases.
Our operating leases primarily consist of office space, construction trailers, model leasebacks, and equipment or storage units. Certain of our leases offer the option to renew or to increase rental square footage. The execution of such options are at our discretion and may result in a lease modification. We have one financing lease which relates to the development of a future project and was acquired as a result of the acquisition of WLH. The weighted average remaining lease term of our financing lease is 87.9 years, and the weighted average discount rate used in determining the lease liability is 7.3%. We currently capitalize all lease costs incurred with this finance lease as it is prepared for its intended use. The amount of interest on the financing lease liability and the amortization of right of use asset was immaterial for the year ended December 31, 2020.
A summary of our operating leases is shown below:
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As of the year ended December 31,
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(Dollars in millions)
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2020
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2019
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Weighted average discount rate
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6.1
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%
|
|
5.8
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%
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Weighted average remaining lease term (in years)
|
5.2
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|
6.0
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Payments on lease liabilities
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$16.8
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|
$9.4
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Recorded lease expense
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$14.8
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|
$9.1
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The future minimum lease payments required under our operating leases as of December 31, 2020 are as follows (dollars in thousands):
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Years Ending December 31,
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Lease
Payments
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2021
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$
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16,804
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|
2022
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14,447
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|
2023
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11,991
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2024
|
9,409
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2025
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7,085
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Thereafter
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9,484
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Total lease payments
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$
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69,220
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Less: Interest
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$
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9,560
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Present value of lease liabilities(1)
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$
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59,660
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(1) Present value of lease liability relating to our financing lease is $23.6 million and is excluded from the table above.
Real Estate Inventory — Inventory consists of raw land, land under development, homes under construction, completed homes, and model homes, all of which are stated at cost. In addition to direct carrying costs, we also capitalize interest, real estate taxes, and related development costs that benefit the entire community, such as field construction supervision and related direct overhead. Home vertical construction costs are accumulated and charged to cost of sales at the time of home closing using the specific identification method. Land acquisition, development, interest, and real estate taxes are allocated to homes and units generally using the relative sales value method. Generally, all overhead costs relating to purchasing, vertical construction of a home, and construction utilities are considered overhead costs and allocated on a per unit basis. These costs are capitalized to inventory from the point development begins to the point construction is completed. Changes in estimated costs to be incurred in a community are generally allocated to the remaining lots on a prospective basis. For those communities that have been temporarily closed or development has been discontinued, we do not allocate interest or other costs to the community’s inventory until activity resumes. Such costs are expensed as incurred.
The life cycle of a typical community generally ranges from two to five years, commencing with the acquisition of unentitled or entitled land, continuing through the land development phase and concluding with the sale, construction and delivery of homes. Actual community duration will vary based on the size of the community, the sales absorption rate and whether we purchased the property as raw land or as finished lots.
We capitalize qualifying interest costs to inventory during the development and construction periods. Capitalized interest is charged to cost of sales when the related inventory is charged to cost of sales.
We assess the recoverability of our inventory in accordance with the provisions of ASC Topic 360, Property, Plant, and Equipment. We review our real estate inventory for indicators of impairment on a community-level basis during each reporting period. If indicators of impairment are present for a community, an undiscounted cash flow analysis is usually prepared in order to determine if the carrying value of the assets in that community exceeds the undiscounted cash flows. Generally, if the carrying value of the assets exceeds their estimated undiscounted cash flows, the assets are potentially impaired, requiring a fair value analysis. Our determination of fair value is primarily based on a discounted cash flow model which includes projections and estimates relating to sales prices, construction costs, sales pace, and other factors. However, fair value can be determined through other methods, such as appraisals, contractual purchase offers, and other third party opinions of value. Changes in these expectations may lead to a change in the outcome of our impairment analysis, and actual results may also differ from our assumptions. For the year ended December 31, 2020, we recorded $9.6 million of impairment charges, all of which related to our East reporting segment. For the year ended December 31, 2019, excluding our Chicago operations, we recorded $8.9 million of impairment charges, of which $2.0 million and $6.9 million related to our East and Central reporting segments, respectively. For the year ended December 31, 2018, we recorded $9.6 million of impairment charges, of which $8.5 million and $1.1 million related to our East and West reporting segments, respectively. Impairment charges are recorded to Cost of home closings or Cost of land closings on the Consolidated Statement of Operations.
In certain cases, we may elect to cease development and/or marketing of an existing community if we believe the economic performance of the community would be maximized by deferring development for a period of time to allow for market conditions to improve. We refer to such communities as long-term strategic assets. The decision may be based on financial and/or operational metrics as determined by us. If we decide to cease development, we will evaluate the project for impairment and then cease future development and marketing activity until such a time when we believe that market conditions have improved and economic performance can be maximized. Our assessment of the carrying value of our long-term strategic assets typically includes subjective estimates of future performance, including the timing of when development will recommence, the type of product to be offered, and the margin to be realized. In the future, some of these inactive communities may be re-opened while others may be sold.
Land held for sale — In some locations where we act as a developer, we occasionally purchase land that includes commercially zoned parcels or areas designated for school or government use, which we typically sell to commercial developers or municipalities, as applicable. We also sell residential lots or land parcels to manage our land and lot supply on larger tracts of land. Land is considered held for sale if there is a contract to sell the parcel or once we begin or intend to begin actively selling it. Land held for sale is recorded at the lower of cost or fair value less costs to sell. In determining the value of land held for sale, we consider recent offers received, prices for land in recent comparable sales transactions, and other factors. We record fair value adjustments for land held for sale within Cost of land closings on the Consolidated Statement of Operations.
As of December 31, 2019, the homebuilding assets in Chicago were held for sale, and as a result we adjusted the fair value of the assets within this division to the lower of fair value (less costs to sell) or net book value. In addition, we wrote off other components of the operations in accordance with the guidance set forth in ASC 360. For the year ended December 31, 2019 total impacts to the Consolidated Statement of Operations included the following: Cost of home closings impact of $0.7 million, Cost of land closings impact of $9.9 million, Sales, commissions and other marketing costs impact of $0.4 million, General and
administrative expenses impact of $1.1 million and Other expense, net impact of $1.2 million. For the years ended December 31, 2020 and 2018, we did not have material fair value adjustments relating to assets reclassified as held for sale.
Land banking arrangements — As part of our acquisition of WLH, we have land purchase agreements with various land sellers. As a method of acquiring land in staged takedowns, while limiting risk and minimizing the use of funds from our available cash or other financing sources, we may transfer our right under certain specific performance agreements to entities owned by third parties (“land banking arrangements”). These entities use equity contributions from their owners and/or incur debt to finance the acquisition and development of the land. The entities grant us an option to acquire lots in staged takedowns. In consideration for this option, we make a non-refundable deposit of 15% to 25% of the total purchase price. We are not legally obligated to purchase the balance of the lots, but would forfeit any existing deposits and could be subject to financial and other penalties if the lots were not purchased. We do not have ownership interest in these entities or title to assets and do not guarantee their liabilities. These land banking arrangements help us manage the financial and market risk associated with land holdings.
Land Deposits — We make deposits related to land options, land banking, and land purchase contracts, which, when provided, are capitalized until the associated property is purchased. Non-refundable deposits are recorded as a real estate inventory in the accompanying Consolidated Balance Sheets at the time the deposit is applied to the acquisition price of the land based on the terms of the underlying agreements. To the extent the deposits are non-refundable, they are charged to expense if the land acquisition process is terminated or no longer determined probable.
Mortgage Loans Held for Sale — Mortgage loans held for sale consist of mortgages due from buyers of Taylor Morrison homes that are financed through our mortgage finance subsidiary, TMHF. Mortgage loans held for sale are carried at fair value, which is calculated using observable market information, including pricing from actual market transactions, investor commitment prices, or broker quotations. The fair value for mortgage loans held for sale covered by investor commitments is generally based on commitment prices. The fair value for mortgage loans held for sale not committed to be purchased by an investor is generally based on current delivery prices using best execution pricing.
Derivative Assets — We are exposed to interest rate risk for interest rate lock commitments (“IRLCs”) and originated mortgage loans held for sale until those loans are sold in the secondary market. The price risk related to changes in the fair value of IRLCs and mortgage loans held for sale not committed to be purchased by investors are subject to change primarily due to changes in market interest rates. We manage the interest rate and price risk associated with our outstanding IRLC's and mortgage loans held for sale not committed to be purchased by investors by entering into hedging instruments such as forward loan sales commitments and mandatory delivery commitments. We expect these instruments will experience changes in fair value inverse to changes in the fair value of the IRLCs and mortgage loans held for sale not committed to investors, thereby reducing earnings volatility. Best effort sale commitments are also executed for certain loans at the time the IRLC is locked with the borrower. The fair value of the best effort IRLC and mortgages receivable are valued using the commitment price to the investor. We take into account various factors and strategies in determining what portion of the IRLCs and mortgage loans held for sale to economically hedge. ASC Topic 815-25, Derivatives and Hedging, requires that all hedging instruments be recognized as assets or liabilities on the balance sheet at their fair value. We do not meet the criteria for hedge accounting; therefore, we account for these instruments as free-standing derivatives, with changes in fair value recognized in Financial services revenue/expenses on the statement of operations in the period in which they occur.
Prepaid Expenses and Other Assets, net — Prepaid expenses and other assets, net consist of the following:
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|
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|
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As of December 31,
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(Dollars in thousands)
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2020
|
|
2019
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Prepaid expenses
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$
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50,368
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|
|
$
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48,674
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Other assets
|
68,502
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|
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33,449
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Build-to-rent assets
|
16,137
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|
|
4,029
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Urban Form
|
107,737
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|
|
—
|
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Total prepaid expenses and other assets, net
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$
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242,744
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|
|
$
|
86,152
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Prepaid expenses consist primarily of sales commissions, sales presentation centers and model home costs, such as design fees and furniture, and the unamortized issuance costs for the Revolving Credit Facility. Prepaid sales commissions are recorded on pre-closing sales activities, which are recognized on the ultimate closing of the units to which they relate. The model home and sales presentation centers costs are paid in advance and amortized over a maximum of three years. Other assets consist
primarily of various operating and escrow deposits, pre-acquisition costs, intangible assets and other deferred costs. Build-to-rent and Urban Form assets consist primarily of land and development costs relating to projects under construction.
Other Receivables, net — Other receivables primarily consist of amounts expected to be recovered from various community development, municipality, and utility districts and utility deposits. Allowances are maintained for potential losses based on historical experience, present economic conditions, and other factors considered relevant. Allowances are recorded in other expense, net, when it becomes likely that some amount will not be collectible. Other receivables are written off when it is determined that collection efforts will no longer be pursued. Allowances at December 31, 2020 and 2019 were immaterial.
Investments in Consolidated and Unconsolidated Entities
Consolidated Entities — In the ordinary course of business, we enter into land purchase contracts, lot option contracts and land banking arrangements in order to procure land or lots for the construction of homes. Such contracts enable us to control significant lot positions with a minimal initial capital investment and substantially reduce the risks associated with land ownership and development. In accordance with ASC Topic 810, Consolidation, we have concluded that when we enter into these agreements to acquire land or lots and pay a non-refundable deposit, a Variable Interest Entity (“VIE”) may be created because we are deemed to have provided subordinated financial support that will absorb some or all of an entity’s expected losses if they occur. If we are the primary beneficiary of the VIE, we will consolidate the VIE in our Consolidated Financial Statements and reflect such assets and liabilities as Consolidated real estate not owned within our real estate inventory balance in the Consolidated Balance Sheets.
Unconsolidated Joint Ventures — We use the equity method of accounting for entities over which we exercise significant influence but do not have a controlling interest over the operating and financial policies of the investee. For unconsolidated entities in which we function as the managing member, we have evaluated the rights held by our joint venture partners and determined that they have substantive participating rights that preclude the presumption of control. Our share of net earnings or losses is included in Equity in income of unconsolidated entities when earned and distributions are credited against our investment in the joint venture when received. Our share of the joint venture profit relating to lots we purchase from the joint ventures is deferred until homes are delivered by us and title passes to a third party. These joint ventures are recorded in Investments in unconsolidated entities on the Consolidated Balance Sheets.
We evaluate our investments in unconsolidated entities for indicators of impairment semi-annually. A series of operating losses of an investee or other factors may indicate that a decrease in value of our investment in the unconsolidated entity has occurred which is other-than-temporary. The amount of impairment recognized is the excess of the investment’s carrying amount over its estimated fair value. Additionally, we consider various qualitative factors to determine if a decrease in the value of the investment is other-than-temporary. These factors include age of the venture, stage in its life cycle, intent and ability for us to recover our investment in the entity, financial condition and long-term prospects of the entity, short-term liquidity needs of the unconsolidated entity, trends in the general economic environment of the land, entitlement status of the land held by the unconsolidated entity, overall projected returns on investment, defaults under contracts with third parties (including bank debt), recoverability of the investment through future cash flows and relationships with the other partners. If we believe that the decline in the fair value of the investment is temporary, then no impairment is recorded. We did not record any impairment charges related to investments in unconsolidated entities for the years ended December 31, 2020, 2019 or 2018.
Income Taxes — We account for income taxes in accordance with ASC Topic 740, Income Taxes. Deferred tax assets and liabilities are recorded based on future tax consequences of 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.
We periodically assess our deferred tax assets, including the benefit from net operating losses, to determine if a valuation allowance is required. A valuation allowance is established when, based upon available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. Realization of the deferred tax assets is dependent upon, among other matters, taxable income in prior years available for carryback, estimates of future income, tax planning strategies, and reversal of existing temporary differences.
Property and Equipment, net — Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is generally computed using the straight-line basis over the estimated useful lives of the assets as follows:
Buildings: 20 – 40 years
Building and leasehold improvements: 10 years or remaining life of building/lease term if less than 10 years
Information systems: over the term of the license
Furniture, fixtures and computer and equipment: 5 – 7 years
Model and sales office improvements: lesser of 3 years or the life of the community
Maintenance and repair costs are expensed as incurred.
Depreciation expense was $6.3 million, $4.8 million, and $4.0 million, respectively, for the years ended December 31, 2020, 2019, and 2018 . Depreciation expense is recorded in General and administrative expenses in the Consolidated Statements of Operations.
Goodwill — The excess of the purchase price of a business acquisition over the net fair value of assets acquired and liabilities assumed is capitalized as goodwill in accordance with ASC Topic 350, Intangibles — Goodwill and Other.
ASC 350 requires that goodwill and intangible assets that do not have finite lives not be amortized, but rather assessed for impairment at least annually or more frequently if certain impairment indicators are present. We perform our annual impairment test during the fourth quarter or whenever impairment indicators are present. As a result of COVID-19 and the instability of the equity markets, we performed a qualitative goodwill analysis on a quarterly basis during 2020. Taking into consideration the fluctuations in the equity markets, general economic conditions, homebuilding industry conditions, our overall financial performance, and the gap between our net assets and market capitalization, we concluded there were no indicators that goodwill was impaired at each quarter end during 2020. In addition, we performed our annual test which included both a quantitative and qualitative analysis and concluded there was no impairment of goodwill at December 31, 2020. For the year ended December 31, 2020, there was an addition to goodwill of $513.8 million related to the WLH acquisition. For the years ended December 31, 2019 and 2018, there was no impairment of goodwill.
Insurance Costs, Self-Insurance Reserves and Warranty Reserves — We have certain deductible limits for each of our policies under our workers’ compensation, automobile, and general liability insurance policies, and we record warranty expense and liabilities for the estimated costs of potential claims for construction defects. The excess liability limits are $50 million per occurrence, aggregated annually and applied in excess of automobile liability, employer’s liability under workers compensation and general liability policies. We also generally require our subcontractors and design professionals to indemnify us and provide evidence of insurance for liabilities arising from their work, subject to certain limitations. We are the parent of Beneva Indemnity Company (“Beneva”), which provides insurance coverage for construction defects discovered up to ten years following the close of a home, coverage for premise operations risk, and property damage. We accrue for the expected costs associated with the deductibles and self-insured amounts under our various insurance policies based on historical claims, estimates for claims incurred but not reported, and potential for recovery of costs from insurance and other sources. The estimates are subject to significant variability due to factors, such as claim settlement patterns, litigation trends, and the extended period of time in which a construction defect claim might be made after the closing of a home.
We offer a one year limited warranty to cover various defects in workmanship or materials, two year limited warranty on certain systems (such as electrical or cooling systems), and a ten year limited warranty on structural defects. Warranty reserves are established as homes close in an amount estimated to be adequate to cover expected costs of materials and outside labor during warranty periods. Our warranty is not considered a separate deliverable in the sales arrangement since it is not priced apart from the home, therefore, it is accounted for in accordance with ASC Topic 450, Contingencies, which states that warranties that are not separately priced are generally accounted for by accruing the estimated costs to fulfill the warranty obligation. The amount of revenue related to the product is recognized in full upon the delivery of the home if all other criteria for revenue recognition have been met. As a result, we accrue the estimated costs to fulfill the warranty obligation at the time a home closes, as a component of Cost of home closings on the Consolidated Statements of Operations.
Our loss reserves are based on factors that include an actuarial study for structural, historical and anticipated claims, trends related to similar product types, number of home closings, and geographical areas. We also provide third-party warranty coverage on homes where required by Federal Housing Administration or Veterans Administration lenders. We regularly review the reasonableness and adequacy of our reserves and make adjustments to the balance of the preexisting reserves to reflect changes in trends and historical data as information becomes available. Self-insurance and warranty reserves are included in Accrued expenses and other liabilities in the Consolidated Balance Sheets.
Stock Based Compensation — We have stock options, performance based restricted stock units and non-performance-based restricted stock units which we account for in accordance with ASC Topic 718-10, Compensation — Stock Compensation. The fair value for stock options is measured and estimated on the date of grant using the Black-Scholes option pricing model and recognized evenly over the vesting period of the options. Performance-based restricted stock units are measured using the closing price on the date of grant and expensed using a probability of attainment calculation which determines the likelihood of
achieving the performance targets. Non-performance-based restricted stock units are time-based awards and measured using the closing price on the date of grant and are expensed ratably over the vesting period on a straight-line basis.
Employee Benefit Plans — We maintain a defined contribution plan pursuant to Section 401(k) of the IRC (“401(k) Plan”). Each eligible employee may elect to make before-tax contributions up to the current tax limits. We match 100% of employees’ voluntary contributions up to 2% of eligible compensation, and 50% for each dollar contributed between 2% and 6% of eligible compensation. During the year ended December 31, 2020, the employee match portion of the plan was paused for one quarter as part of our efforts to reduce spending during the early onset of the COVID-19 pandemic. We contributed $4.7 million, $10.7 million, and $9.3 million to the 401(k) Plan for the twelve months ended December 31, 2020, 2019, and 2018, respectively.
Treasury Stock — We account for treasury stock in accordance with ASC Topic 505-30, Equity - Treasury Stock. Repurchased shares are reflected as a reduction in stockholders' equity and subsequent sale of repurchased shares are recognized as a change in equity. When factored into our weighted average calculations for purposes of earnings per share, the number of repurchased shares is based on the settlement date.
Revenue Recognition — Revenue is recognized in accordance with ASC Topic 606, Revenue from Contracts with Customers. The standard's core principle requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services.
Home and land closings revenue
Under Topic 606, the following steps are applied to determine the proper home closings revenue and land closings revenue recognition: (1) we identify the contract(s) with our customer; (2) we identify the performance obligations in the contract; (3) we determine the transaction price; (4) we allocate the transaction price to the performance obligations in the contract; and (5) we recognize revenue when (or as) we satisfy the performance obligation. For our home sales transactions, we have one contract, with one performance obligation, with each customer to build and deliver the home purchased (or develop and deliver land). Based on the application of the five steps, the following summarizes the timing and manner of home and land sales revenue:
•Revenue from closings of residential real estate is recognized when closings have occurred, the buyer has made the required minimum down payment, obtained necessary financing, the risks and rewards of ownership are transferred to the buyer, and we have no continuing involvement with the property, which is generally upon the close of escrow. Revenue is reported net of any discounts and incentives.
•Revenue from land sales is recognized when a significant down payment is received, title passes and collectability of the receivable is reasonably assured, and we have no continuing involvement with the property, which is generally upon the close of escrow.
Amenity and other revenue
We own and operate certain amenities such as golf courses, club houses, and fitness centers, which require us to provide club members with access to the facilities in exchange for the payment of club dues. We collect club dues and other fees from the club members, which are invoiced on a monthly basis. Revenue from our golf club operations is also included in amenity and other revenue. Amenity and other revenue also includes revenue from the sale of assets which include multi-use properties as part of our Urban Form operations.
Financial services revenue
Mortgage operations and hedging activity related to financial services are not within the scope of Topic 606. Loan origination fees (including title fees, points, and closing costs) are recognized at the time the related real estate transactions are completed, usually upon the close of escrow. All of the loans TMHF originates are sold to third party investors within a short period of time, on a non-recourse basis. Gains and losses from the sale of mortgages are recognized in accordance with ASC Topic 860-20, Sales of Financial Assets. TMHF does not have continuing involvement with the transferred assets; therefore, we derecognize the mortgage loans at time of sale, based on the difference between the selling price and carrying value of the related loans upon sale, recording a gain/loss on sale in the period of sale. Also included in Financial services revenue/expenses is the realized and unrealized gains and losses from hedging instruments.
Advertising Costs — We expense advertising costs as incurred. For the years ended December 31, 2020, 2019 and 2018, advertising costs were $31.9 million, $32.0 million, and $30.7 million, respectively. Such costs are included in General and administrative expenses on the Consolidated Statements of Operations.
Recently Issued Accounting Pronouncements — In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for us in our fiscal year beginning January 1, 2021. We do not believe the adoption of ASU 2019-12 will have a material impact on our consolidated financial statements and disclosures.
3. BUSINESS COMBINATIONS
In accordance with ASC Topic 805, Business Combinations, all assets acquired and liabilities assumed from our acquisitions of WLH and AV Homes were measured and recognized at fair value as of the date of the acquisition to reflect the purchase price paid.
WLH Acquisition
We completed the acquisition of WLH on February 6, 2020, for total purchase consideration of $1.1 billion, consisting of multiple components: (i) cash of $95.6 million, (ii) the issuance of approximately 30.6 million shares of TMHC Common Stock with a value of $836.1 million, (iii) the repayment of $160.8 million of borrowings under WLH's Revolving Credit Facility, and (iv) the conversion of WLH issued equity instruments consisting of restricted stock units, restricted stock awards, options and warrants to TMHC awards and warrants with a value of $24.07 million.
On June 3 and 4, 2020, three dissenting former WLH shareholders filed petitions for appraisal in the Delaware Court of Chancery, in connection with the merger transaction whereby we acquired WLH. The petitioners did not accept the merger consideration and sought a judicial determination of the “fair value” of their shares. On June 29, 2020, we entered into a settlement agreement pursuant to which the petitioners released their claims in exchange for a subsequent total cash payment of approximately $62.2 million. As a result, although the total purchase price for the acquisition remained unchanged, the total cash paid increased from $95.6 million to $157.8 million, and the total equity issued, excluding warrants, comprised 28.3 million shares of TMHC Common Stock with a value of $773.9 million.
We determined the estimated fair value of inventory on a community-level basis, using a reasonable range of market comparable gross margins based on the inventory geography and product type. These estimates are significantly impacted by assumptions related to expected average home selling prices and sales incentives, expected sales paces and cancellation rates, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. Such estimates were made for each individual community and varied significantly between communities. We believe our estimates and assumptions are reasonable.
The following is a summary of the final fair value of assets acquired and liabilities assumed.
|
|
|
|
|
|
(Dollars in thousands)
|
WLH
|
Acquisition Date
|
February 6, 2020
|
Assets acquired
|
|
Real estate inventory
|
$
|
2,069,323
|
|
|
|
Prepaid expenses and other assets(1)
|
265,729
|
|
Deferred tax assets, net
|
148,193
|
|
|
|
Goodwill(2)
|
513,768
|
|
Total assets
|
$
|
2,997,013
|
|
|
|
Less liabilities assumed
|
|
Accrued expenses and other liabilities
|
$
|
457,365
|
|
|
|
Total Debt(3)
|
1,306,578
|
|
Non-controlling interest
|
116,157
|
|
Net assets acquired
|
$
|
1,116,913
|
|
(1) Includes cash acquired.
(2) Goodwill is not deductible for tax purposes. We allocated $465.6 million and $48.2 million of goodwill to the West and Central homebuilding segments, respectively.
(3) See Note 9 - Debt
The following presents the final measurement period adjustments in fair value from the previously reported provisional balances as of March 31, 2020:
•Real estate inventory decreased by approximately $64.8 million
•Prepaid expenses and other assets increased by approximately $4.1 million
•Deferred tax assets, net increased by approximately $20.0 million
•Accrued expenses and other liabilities increased by approximately $10.1 million
As a result of the changes in fair value above, goodwill increased by approximately $51.1 million since the date of our provisional estimate. The current period fair value adjustments relating to the year ended December 31, 2020 included a reduction to Cost of home closings of $4.2 million and a reduction to General and administrative expense of $0.2 million for the changes in depreciation and amortization as a result of the fair value of prepaid expenses and other assets.
AV Homes Acquisition
We completed the acquisition of AV Homes on October 2, 2018, for a total purchase consideration of $534.9 million, consisting of three components: (i) cash equal to $280.4 million, (ii) the assumption of convertible notes with a face value of $80.0 million which were converted for $95.8 million in cash, and (iii) the issuance of approximately 8.95 million shares of Common Stock.
We determined the estimated fair value of real estate inventory primarily using the sales comparison and income approaches. To a certain extent, certain inventory was valued using third party appraisals and/or market comparisons. The sales comparison approach was used for all inventory in process. The income approach derives a value using a discounted cash flow for income-producing real property. This approach was used exclusively for finished lots. These estimated cash flows and ultimate valuation are significantly affected by the discount rate, estimates related to expected average selling prices and sales incentives, expected sales paces and cancellation rates, expected land development and construction timelines, and anticipated land development, construction, overhead costs and may vary significantly between communities.
The following is a summary of the final fair value of assets acquired and liabilities assumed.
|
|
|
|
|
|
(Dollars in thousands)
|
AV Homes
|
Acquisition Date
|
October 2, 2018
|
Assets acquired
|
|
Real estate inventory
|
$
|
782,424
|
|
|
|
Prepaid expenses and other assets(1)
|
107,004
|
|
Deferred tax assets, net
|
69,456
|
|
Property and equipment
|
50,996
|
|
Goodwill(2)
|
83,230
|
|
Total assets
|
$
|
1,093,110
|
|
|
|
Less liabilities assumed
|
|
Accrued expenses and other liabilities
|
$
|
94,308
|
|
Customer deposits
|
14,130
|
|
Estimated development liability(3)
|
37,230
|
|
Senior notes, net
|
412,520
|
|
Net assets acquired
|
$
|
534,922
|
|
(1) Includes cash acquired.
(2) Goodwill is not deductible for tax purposes. We allocated $43.3 million of goodwill to the East homebuilding segment, $30.0 million to the Central homebuilding segment, and $9.9 million to the West homebuilding segment.
(3) See Note 8 - Estimated Development Liability.
Unaudited Pro Forma Results of Business Combinations
Each of the following unaudited pro forma information for the periods presented include the results of operations of our acquisitions of WLH and AV Homes as if they were completed on January 1, 2019 and January 1, 2017, respectively. The pro forma results are presented for informational purposes only and do not purport to be indicative of the results of operations or future results that would have been achieved if the acquisition had taken place one year prior to the acquisition year. The pro forma information combines the historical results of the Company with the historical results of each of our acquisitions for the periods presented.
The unaudited pro forma results do not give effect to any synergies, operating efficiencies, or other costs savings that may result from the acquisitions, or other significant non-reoccurring expenses or transactions that do not have a continuing impact. Earnings per share utilizes pro forma net income available to TMHC and total weighted average shares of common stock. The pro forma amounts are based on available information and certain assumptions that we believe are reasonable.
Pro forma presentation for the WLH acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(Dollars in thousands except per share data)
|
2020
|
|
2019
|
Total revenue
|
$
|
6,216,418
|
|
|
$
|
6,751,846
|
|
|
|
|
|
Net income before allocation to non-controlling interests
|
309,022
|
|
|
171,114
|
|
Net (income)/loss attributable to non-controlling interests — joint ventures
|
6,975
|
|
|
30,661
|
|
|
|
|
|
Net income available to TMHC
|
$
|
302,047
|
|
|
$
|
140,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares - Basic
|
131,011
|
|
|
135,661
|
|
Weighted average shares - Diluted
|
132,370
|
|
|
136,952
|
|
|
|
|
|
Earnings per share - Basic
|
$
|
2.31
|
|
|
$
|
1.04
|
|
Earnings per share - Diluted
|
$
|
2.28
|
|
|
$
|
1.03
|
|
For the year ended December 31, 2020, total revenue on the Consolidated Statement of Operations included $1.6 billion of revenues, and earnings before income taxes included $48.0 million of pre-tax earnings from WLH since the date of acquisition.
Pro forma presentation for the AV Homes acquisition
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(Dollars in thousands except per share data)
|
2018
|
Total revenues
|
$
|
4,780,138
|
|
|
|
Net income
|
$
|
231,270
|
|
Net income attributable to non-controlling interests — joint ventures
|
(533)
|
|
Net income attributable to non-controlling interest - Former Principal Equityholders
|
(3,713)
|
|
Net income available to TMHC - Basic
|
$
|
227,024
|
|
Net income attributable to non-controlling interest - Former Principal Equityholders
|
3,713
|
|
Loss fully attributable to public holding company
|
540
|
|
Net income - Diluted
|
$
|
231,277
|
|
|
|
Weighted average shares - Basic
|
118,593
|
|
Weighted average shares - Diluted
|
121,969
|
|
|
|
Earnings per share - Basic
|
$
|
1.91
|
|
Earnings per share - Diluted
|
$
|
1.90
|
|
For the year ended December 31, 2018, total revenue on the Consolidated Statement of Operations included $234.3 million of revenues, and earnings before income taxes included $7.7 million of pre-tax earnings from AV Homes since the date of acquisition.
4. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to TMHC by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings per share gives effect to the potential dilution that could occur if all outstanding equity awards to issue shares of Common Stock were exercised or settled.
The following is a summary of the components of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands except per share data)
|
2020
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to TMHC— basic
|
$
|
243,439
|
|
|
$
|
254,652
|
|
|
$
|
206,364
|
|
Net income attributable to non-controlling interest - Former Principal Equityholders
|
—
|
|
|
—
|
|
|
3,583
|
|
Loss fully attributable to public holding company
|
—
|
|
|
—
|
|
|
540
|
|
Net income — diluted
|
$
|
243,439
|
|
|
$
|
254,652
|
|
|
$
|
210,487
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Weighted average shares — basic
|
127,812
|
|
|
106,997
|
|
|
111,743
|
|
Weighted average shares — non-controlling interest (1)
|
—
|
|
|
—
|
|
|
1,935
|
|
Restricted stock units
|
865
|
|
|
983
|
|
|
1,117
|
|
Stock options
|
319
|
|
|
309
|
|
|
324
|
|
Warrants
|
174
|
|
|
—
|
|
|
—
|
|
Weighted average shares — diluted
|
129,170
|
|
|
108,289
|
|
|
115,119
|
|
Earnings per common share — basic:
|
|
|
|
|
|
Net income available to Taylor Morrison Home Corporation
|
$
|
1.90
|
|
|
$
|
2.38
|
|
|
$
|
1.85
|
|
Earnings per common share — diluted:
|
|
|
|
|
|
Net income available to Taylor Morrison Home Corporation
|
$
|
1.88
|
|
|
$
|
2.35
|
|
|
$
|
1.83
|
|
(1)Shares of the former Class B Common Stock had voting rights but did not have economic rights or rights to dividends or distribution on liquidation and therefore were not participating securities. Accordingly, Class B Common Stock was not included in basic earnings per share. In connection with our corporate reorganization (refer to Note 1 - Business), on October 26, 2018, all remaining outstanding shares of Class B Common Stock, together with their corresponding New TMM Units, were exchanged for Common Stock. All outstanding shares of Class B Common Stock were retired following the exchange.
We excluded a total weighted average of 2,335,006, 2,394,703, and 2,232,647 anti-dilutive stock options and unvested performance and non-performance restricted stock units from the calculations of earnings per share for the years ended December 31, 2020, 2019, and 2018, respectively.
5. REAL ESTATE INVENTORY AND LAND DEPOSITS
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(Dollars in thousands)
|
2020
|
|
2019
|
Real estate developed or under development
|
$
|
3,862,785
|
|
|
$
|
2,805,506
|
|
Real estate held for development or held for sale (1)
|
110,954
|
|
|
146,471
|
|
Operating communities (2)
|
1,072,134
|
|
|
899,789
|
|
Capitalized interest
|
163,780
|
|
|
115,593
|
|
Total owned inventory
|
5,209,653
|
|
|
3,967,359
|
|
Consolidated real estate not owned
|
122,773
|
|
|
19,185
|
|
Total real estate inventory
|
$
|
5,332,426
|
|
|
$
|
3,986,544
|
|
(1) Real estate held for development or held for sale includes properties which are not in active production. This includes raw land recently purchased or awaiting entitlement, and, if applicable, long-term strategic assets. As of December 31, 2019, all inventory relating to our Chicago operations were deemed held for sale and included in Total owned inventory on the Consolidated Balance Sheet. During the year ended December 31, 2020, we completed the disposal of our Chicago operations.
(2) Operating communities consist of all vertical construction costs relating to homes in progress and completed homes for all active inventory.
The development status of our land inventory is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(Dollars in thousands)
|
2020
|
|
2019
|
|
Owned Lots
|
|
Book Value of Land and Development
|
|
Owned Lots
|
|
Book Value of Land and Development
|
Raw(1)
|
12,330
|
|
|
$
|
356,681
|
|
|
13,804
|
|
|
$
|
477,997
|
|
Partially developed
|
19,495
|
|
|
1,215,419
|
|
|
13,298
|
|
|
914,689
|
|
Finished
|
21,396
|
|
|
2,388,177
|
|
|
15,504
|
|
|
1,559,291
|
|
Long-term strategic assets
|
158
|
|
|
13,462
|
|
|
—
|
|
|
—
|
|
Total
|
53,379
|
|
|
$
|
3,973,739
|
|
|
42,606
|
|
|
$
|
2,951,977
|
|
(1) Number of owned lots and book value of land and development inclusive of commercial assets which are lots designated for commercial space and not homebuilding lots.
Land Deposits — We provide deposits related to land options and land purchase contracts, which are capitalized when paid and classified as Land deposits until the associated property is purchased.
As of December 31, 2020 and 2019, we had the right to purchase approximately 7,449 and 4,263 lots under land option purchase contracts, respectively, for an aggregate purchase price of $485.4 million and $289.7 million, respectively. We do not have title to these properties, and the creditors generally have no recourse against us. As of December 31, 2020 and 2019, our exposure to loss related to our option contracts with third parties and unconsolidated entities consisted of non-refundable deposits totaling $65.3 million and $39.8 million, respectively.
In connection with our acquisition of WLH, we acquired various land banking arrangements. As of December 31, 2020, we had the right to purchase 2,426 lots under such land agreements for an aggregate purchase price of $275.0 million. We are not legally obligated to purchase the balance of the lots. As of December 31, 2020, our exposure to loss related to deposits on land banking arrangements totaled $60.3 million.
Capitalized Interest — Interest capitalized, incurred and amortized is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands)
|
2020
|
|
2019
|
|
2018
|
Interest capitalized — beginning of period
|
$
|
115,593
|
|
|
$
|
96,031
|
|
|
$
|
90,496
|
|
Interest incurred
|
164,085
|
|
|
113,301
|
|
|
87,957
|
|
Interest amortized to cost of home closings
|
(115,898)
|
|
|
(93,739)
|
|
|
(82,422)
|
|
Interest capitalized — end of period
|
$
|
163,780
|
|
|
$
|
115,593
|
|
|
$
|
96,031
|
|
6. INVESTMENTS IN CONSOLIDATED AND UNCONSOLIDATED ENTITIES
Unconsolidated Entities
We have investments in a number of joint ventures with third parties, with ownership interests up to 50%. These entities are generally involved in real estate development, homebuilding and/or mortgage lending activities. Some of these joint ventures develop land for the sole use of the joint venture participants, including us, and others develop land for sale to both the joint venture participants and to unrelated builders. Our share of the joint venture profit relating to lots we purchase from the joint ventures is deferred until homes are delivered by us and title passes to a homebuyer.
Summarized, unaudited combined financial information of unconsolidated entities that are accounted for by the equity method is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(Dollars in thousands)
|
2020
|
|
2019
|
Assets:
|
|
|
|
Real estate inventory
|
$
|
342,451
|
|
|
$
|
367,225
|
|
Other assets
|
133,903
|
|
|
132,812
|
|
Total assets
|
$
|
476,354
|
|
|
$
|
500,037
|
|
Liabilities and owners’ equity:
|
|
|
|
Debt
|
$
|
183,911
|
|
|
$
|
178,686
|
|
Other liabilities
|
21,215
|
|
|
20,490
|
|
Total liabilities
|
$
|
205,126
|
|
|
$
|
199,176
|
|
Owners’ equity:
|
|
|
|
TMHC
|
127,955
|
|
|
128,759
|
|
Others
|
143,273
|
|
|
172,102
|
|
Total owners’ equity
|
271,228
|
|
|
300,861
|
|
Total liabilities and owners’ equity
|
$
|
476,354
|
|
|
$
|
500,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands)
|
2020
|
|
2019
|
|
2018
|
Revenues
|
$
|
161,888
|
|
|
$
|
277,263
|
|
|
$
|
381,274
|
|
Costs and expenses
|
(129,764)
|
|
|
(242,044)
|
|
|
(328,565)
|
|
Income of unconsolidated entities
|
$
|
32,124
|
|
|
$
|
35,219
|
|
|
$
|
52,709
|
|
TMHC's share in income of unconsolidated entities
|
$
|
11,176
|
|
|
$
|
9,509
|
|
|
$
|
13,332
|
|
Distributions from unconsolidated entities
|
$
|
51,626
|
|
|
$
|
34,057
|
|
|
$
|
68,847
|
|
Consolidated Entities
As a result of the acquisition of WLH, we had a total of 25 joint ventures as of December 31, 2020 for the purpose of land development and homebuilding activities, which we have determined to be VIEs. As the managing member, we oversee the daily operations and have the power to direct the activities of the VIEs, or joint ventures. Based upon the allocation of income and loss per the applicable joint venture agreements and certain performance guarantees, we have potentially significant exposure to the risks and rewards of the joint ventures. Therefore, we are the primary beneficiary of the joint ventures, and the entities are consolidated as of December 31, 2020.
As of December 31, 2020, the assets of all our consolidated joint ventures, including WLH, totaled $389.2 million, of which $25.8 million was cash and cash equivalents and $320.4 million was owned inventory. The liabilities of the consolidated joint ventures totaled $216.4 million, primarily comprised of notes payable, accounts payable and accrued liabilities.
7. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(Dollars in thousands)
|
2020
|
|
2019
|
Real estate development costs to complete
|
$
|
38,935
|
|
|
$
|
20,598
|
|
Compensation and employee benefits
|
113,896
|
|
|
95,585
|
|
Self-insurance and warranty reserves
|
118,116
|
|
|
120,048
|
|
Interest payable
|
45,917
|
|
|
23,178
|
|
Property and sales taxes payable
|
28,523
|
|
|
12,537
|
|
Other accruals
|
84,680
|
|
|
53,422
|
|
Total accrued expenses and other liabilities
|
$
|
430,067
|
|
|
$
|
325,368
|
|
Self Insurance and Warranty Reserves — We accrue for the expected costs associated with our limited warranty,
deductibles and self-insured amounts under our various insurance policies within Beneva, a
wholly owned subsidiary. A summary of the changes in our reserves are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands)
|
2020
|
|
2019
|
|
2018
|
Reserve — beginning of period
|
$
|
120,048
|
|
|
$
|
93,790
|
|
|
$
|
51,010
|
|
Net additions to reserves due to WLH acquisition
|
9,984
|
|
|
—
|
|
|
—
|
|
Additions to reserves
|
62,722
|
|
|
44,093
|
|
|
51,674
|
|
Costs and claims incurred
|
(82,137)
|
|
|
(67,554)
|
|
|
(42,433)
|
|
Change in estimates to pre-existing reserves (1)
|
7,499
|
|
|
49,719
|
|
|
33,539
|
|
Reserve — end of period
|
$
|
118,116
|
|
|
$
|
120,048
|
|
|
$
|
93,790
|
|
(1) Changes in estimates to pre-existing reserves for the years ended December 31, 2019 and 2018 included a $43.1 million and $39.3 million charge, respectively, for construction defect remediation isolated to one specific community in the Central region. There was no charge for the year ended December 31, 2020 relating to this defect remediation. The reserve balances for the specific construction defect issue as of December 31, 2020, 2019, and 2018 were $12.7 million, $36.3 million, and $27.6 million, respectively. The reserve estimate is based on assumptions, including but not limited to the number of homes affected, the costs associated with each repair, and the effectiveness of the repairs. Due to the degree of judgement required in making these estimates and the inherent uncertainty in potential outcomes, it is reasonably possible that actual costs could differ from those recorded and such differences could be material, resulting in a change in future estimated reserves.
8. ESTIMATED DEVELOPMENT LIABILITY
The estimated development liability consists primarily of estimated future utilities improvements in Poinciana, Florida and Rio Rico, Arizona for more than 8,000 home sites previously sold, in most cases prior to 1980. The estimated development liability is reduced by actual expenditures and is evaluated and adjusted, as appropriate, to reflect management’s estimate of potential completion costs. At December 31, 2020 and 2019, these liabilities are based on third-party engineer cost estimate reports which reflect the estimated completion costs. Future increases or decreases of costs for construction, material and labor, as well as other land development and utilities infrastructure costs, may have a significant effect on the estimated development liability.
9. DEBT
Total debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
(Dollars in thousands)
|
Principal
|
|
Unamortized Debt Issuance (Costs) / Premium
|
|
Carrying Value
|
|
Principal
|
|
Unamortized Debt Issuance (Costs) / Premium
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.875% Senior Notes due 2023
|
350,000
|
|
|
(1,300)
|
|
|
348,700
|
|
|
350,000
|
|
|
(1,867)
|
|
|
348,133
|
|
5.625% Senior Notes due 2024
|
350,000
|
|
|
(1,705)
|
|
|
348,295
|
|
|
350,000
|
|
|
(2,244)
|
|
|
347,756
|
|
5.875% Senior Notes due 2027
|
500,000
|
|
|
(5,026)
|
|
|
494,974
|
|
|
500,000
|
|
|
(5,808)
|
|
|
494,192
|
|
6.625% Senior Notes due 2027(1)
|
300,000
|
|
|
20,915
|
|
|
320,915
|
|
|
—
|
|
|
—
|
|
|
—
|
|
5.750% Senior Notes due 2028
|
450,000
|
|
|
(4,445)
|
|
|
445,555
|
|
|
450,000
|
|
|
(5,073)
|
|
|
444,927
|
|
5.125% Senior Notes due 2030
|
500,000
|
|
|
(6,074)
|
|
|
493,926
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Senior Notes subtotal
|
2,450,000
|
|
|
2,365
|
|
|
2,452,365
|
|
|
1,650,000
|
|
|
(14,992)
|
|
|
1,635,008
|
|
Loans payable and other borrowings
|
348,741
|
|
|
—
|
|
|
348,741
|
|
|
182,531
|
|
|
—
|
|
|
182,531
|
|
Revolving Credit Facility
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage warehouse borrowings
|
127,289
|
|
|
—
|
|
|
127,289
|
|
|
123,233
|
|
|
—
|
|
|
123,233
|
|
Total debt
|
$
|
2,926,030
|
|
|
$
|
2,365
|
|
|
$
|
2,928,395
|
|
|
$
|
1,955,764
|
|
|
$
|
(14,992)
|
|
|
$
|
1,940,772
|
|
(1) Consists of remaining William Lyon Notes and New Notes (defined below) issued by TM Communities in connection with the Exchange Offer as described below. Unamortized Debt Issuance (Cost)/Premium for such notes is reflective of fair value adjustments as a result of purchase accounting estimates.
Senior Notes
All of our senior notes (the “Senior Notes”) described below and the related guarantees are senior unsecured obligations and are not subject to registration rights. The indentures governing our senior notes (except for the William Lyon Notes as defined below) contain covenants that limit our ability to incur debt secured by liens and enter into certain sale and leaseback transactions and contain customary events of default. None of the indentures for the senior notes have financial maintenance covenants.
In connection with our acquisition of WLH, TM Communities offered to exchange (the “Exchange Offers”) any and all outstanding notes of three series of senior notes issued by WLH (the “William Lyon Notes”) for up to $1.1 billion aggregate principal amount of new notes (the “New Notes”) to be issued by TM Communities. The Exchange Offers were settled on February 10, 2020. All validly tendered and not validly withdrawn William Lyon Notes were accepted for exchange in the Exchange Offers and such William Lyon Notes were retired, canceled, and not reissued. Following such cancellation, $26.0 million aggregate principal amount of 6.00% Senior Notes due 2023 of WLH, $8.5 million aggregate principal amount of 5.875% Senior Notes due 2025 of WLH, and $9.6 million aggregate principal amount of 6.625% Senior Notes due 2027 of WLH remained outstanding. In connection with the consummation of the Exchange Offers, WLH entered into supplemental indentures to eliminate substantially all of the covenants in the indentures governing the William Lyon Notes, including the requirement to offer to purchase such notes upon a change of control and to eliminate certain other restrictive provisions and events that may lead to an “Event of Default” in such indentures. The New Notes were issued by TM Communities and consisted of $324.0 million aggregate principal amount of 6.00% Senior Notes due 2023, $428.4 million aggregate principal amount of 5.875% Senior Notes due 2025, and $290.4 million aggregate principal amount of 6.625% Senior Notes due 2027. The 6.00% Senior Notes due 2023 and 5.875% Senior Notes due 2025 were fully redeemed as of December 31, 2020.
In connection with the acquisition, on February 6, 2020, we satisfied and discharged all $50.0 million of WLH’s 7.00% Senior Notes due 2022 using cash on hand and borrowings from our $800.0 million Revolving Credit Facility, for a total redemption amount of $52.0 million.
The William Lyon Notes and the New Notes are discussed further below.
As of December 31, 2020 we were in compliance with all of the covenants under the Senior Notes.
5.875% Senior Notes due 2023
On April 16, 2015, TM Communities issued $350.0 million aggregate principal amount of 5.875% Senior Notes due 2023 (the “2023 5.875% Senior Notes”), which mature on April 15, 2023. The 2023 5.875% Senior Notes are guaranteed by Taylor Morrison Home III Corporation, Taylor Morrison Holdings, Inc. and their homebuilding subsidiaries (collectively, the “Guarantors”). We are required to offer to repurchase the 2023 5.875% Senior Notes at a price equal to 101% of their aggregate principal amount (plus accrued and unpaid interest) upon certain change of control events where there is a credit rating downgrade that occurs in connection with the change of control.
Prior to January 15, 2023, the 2023 5.875% Senior Notes are redeemable at a price equal to 100% plus a “make-whole” premium for payments through January 15, 2023 (plus accrued and unpaid interest). Beginning January 15, 2023, the 2023 5.875% Senior Notes are redeemable at par (plus accrued and unpaid interest).
5.625% Senior Notes due 2024
On March 5, 2014, TM Communities issued $350.0 million aggregate principal amount of 5.625% Senior Notes due 2024 (the “2024 Senior Notes”), which mature on March 1, 2024. The 2024 Senior Notes are guaranteed by the Guarantors. The change of control provisions in the indenture governing the 2024 Senior Notes are similar to those contained in the indentures governing our other Senior Notes.
Prior to December 1, 2023, the 2024 Senior Notes are redeemable at a price equal to 100% plus a “make-whole” premium for payments through December 1, 2023 (plus accrued and unpaid interest). Beginning on December 1, 2023, the 2024 Senior Notes are redeemable at par (plus accrued and unpaid interest).
5.875% Senior Notes due 2027
On June 5, 2019, TM Communities issued $500.0 million aggregate principal amount of 5.875% Senior Notes due 2027 (the “2027 5.875% Senior Notes”), which mature on June 15, 2027. The 2027 5.875% Senior Notes are guaranteed by the Guarantors. The change of control provisions in the indenture governing the 2027 5.875% Senior Notes are similar to those contained in the indentures governing our other Senior Notes.
Prior to March 15, 2027, the 2027 5.875% Senior Notes are redeemable at a price equal to 100% plus a “make-whole” premium for payments through March 15, 2027 (plus accrued and unpaid interest). Beginning on March 15, 2027, the 2027 5.875% Senior Notes are redeemable at par (plus accrued and unpaid interest).
6.625% Senior Notes due 2027
On February 10, 2020, we completed the Exchange Offers as described above following which we had $290.4 million aggregate principal amount of 6.625% Senior Notes due 2027 issued by TM Communities (the “2027 6.625% TM Communities Notes”) and $9.6 million aggregate principal amount of 6.625% Senior Notes due 2027 issued by WLH (the “2027 6.625% WLH Notes” and together with the 2027 6.625% TM Communities Notes, the “2027 6.625% Senior Notes”). The 2027 6.625% TM Communities Notes are obligations of TM Communities and are guaranteed by the Guarantors. The change of control provisions in the indenture governing the 2027 6.625% TM Communities Notes are similar to those contained in the indentures governing our other Senior Notes.
The 2027 6.625% Senior Notes mature on July 15, 2027. Prior to July 15, 2022, the 2027 6.625% Senior Notes may be redeemed in whole or in part at a redemption price equal to 100% of the principal amount plus a “make-whole” premium, and accrued and unpaid interest, if any, to, but not including, the redemption date. On or after July 15, 2022, the 2027 6.625% Senior Notes are redeemable at a price equal to 103.313% of principal (plus accrued and unpaid interest). On or after July 15, 2023, the 2027 6.625% Senior Notes are redeemable at a price equal to 102.208% of principal (plus accrued and unpaid interest). On or after July 31, 2024, the 2027 6.625% Senior Notes are redeemable at a price equal to a 101.104% of principal (plus accrued and unpaid interest). On or after July 15, 2025, the 2027 6.625% Senior Notes are redeemable at a price equal to 100% of principal (plus accrued and unpaid interest).
In addition, at any time prior to July 15, 2022, we may at the option on one or more occasions, redeem the 2027 6.625% Senior Notes (including any additional notes that may be issues in the future under the 2027 6.625% Senior Notes Indenture) in an aggregate principal amount not to exceed 40% of the aggregate principal amount of the 2027 6.625% Senior Notes at a redemption price (expressed as a percentage of principal amount) of 106.625%, plus accrued and unpaid interest, if any, to, but not including, the redemption date, with an amount equal to the net cash proceeds from one or more equity offerings.
5.75% Senior Notes due 2028
On August 1, 2019, TM Communities issued $450.0 million aggregate principal amount of 5.75% Senior Notes due 2028 (the “2028 Senior Notes”), which mature on January 15, 2028. The 2028 Senior Notes are guaranteed by the same Guarantors that guarantee our other Senior Notes. The change of control provisions in the indenture governing the 2028 Senior Notes are similar to those contained in the indentures governing our other Senior Notes.
Prior to October 15, 2027, the 2028 Senior Notes are redeemable at a price equal to 100% plus a “make-whole” premium for payments through October 15, 2027 (plus accrued and unpaid interest). Beginning on October 15, 2027, the 2028 Senior Notes are redeemable at par (plus accrued and unpaid interest).
5.125% 2030 Senior Notes and Redemption of the 2023 6.00% Senior Notes and Redemption of the 2025 Senior Notes
In July, 2020, $266.9 million of our 6.00% Senior Notes due 2023 (the “2023 6.00% Senior Notes”) and $333.1 million of our 5.875% Senior Notes due 2025 (the “2025 Senior Notes”) were partially redeemed using the net proceeds from the issuance of $500.0 million aggregate principal amount of 5.125% Senior Notes due 2030 (the “2030 Senior Notes”). In September 2020, we redeemed the remaining $83.1 million and $103.8 million of 2023 and 2025 Senior Notes, respectively, using cash on hand. For the 2023 6.00% Senior Notes, the redemption price was equal to 100.0% of the principal amount, plus a make-whole premium of 0.11% plus 50 basis points, plus accrued and unpaid interest to, but excluding the redemption date. For the 2025 Senior Notes, the redemption price was equal to 102.938% of the principal amount, plus accrued and unpaid interest to, but excluding the redemption date. As a result of the early redemption of the 2023 and 2025 Senior Notes, we recorded a total net loss on extinguishment of debt of approximately $10.2 million in Loss on extinguishment of debt, net in the Consolidated Statement of Operations for the year ended December 31, 2020
The 2030 Senior Notes mature on August 1, 2030. The Senior Notes are guaranteed by the same Guarantors that guarantee our other Senior Notes. The change of control provisions in the indenture governing the 2030 Senior Notes are similar to those contained in the indentures governing our other Senior Notes.
Prior to February 1, 2030, the 2030 Senior Notes are redeemable at a price equal to 100.0% plus a “make-whole” premium for payments through February 1, 2030 (plus accrued and unpaid interest). Beginning on February 1, 2030, the 2030 Senior Notes are redeemable at par (plus accrued and unpaid interest).
Revolving Credit Facility
On February 6, 2020 we terminated our $600.0 million Revolving Credit Facility, writing off $1.7 million of debt issuance costs during the first quarter of 2020 to Transaction and corporate reorganization expenses on the Consolidated Statement of
Operations and entered into a new $800.0 million Revolving Credit Facility with a maturity date of February 6, 2024. As a precautionary measure during the COVID-19 pandemic, we had made the decision in the first quarter of 2020 to borrow $485.0 million on our Revolving Credit Facility. As of December 31, 2020, such borrowings have been repaid, and there was no outstanding amount due.
As of December 31, 2020, our $800.0 million Revolving Credit Facility included $1.6 million of unamortized debt issuance costs and $64.3 million of utilized letters of credit, resulting in $735.7 million availability. As of December 31, 2019, our $600.0 million Revolving Credit Facility included $1.8 million of unamortized debt issuance costs and $77.7 million of utilized letters of credit, resulting in $522.3 million availability. Unamortized debt issuance costs are included in Prepaid expenses and other assets, net on the Consolidated Balance Sheets.
The Revolving Credit Facility contains certain “springing” financial covenants, requiring us and our subsidiaries to comply with a maximum debt to capitalization ratio of not more than 0.60 to 1.00 and a minimum consolidated tangible net worth level of at least $2.1 billion. The financial covenants would be in effect for any fiscal quarter during which any (a) loans under the Revolving Credit Facility are outstanding during the last day of such fiscal quarter or on more than five separate days during such fiscal quarter or (b) undrawn letters of credit (except to the extent cash collateralized) issued under the Revolving Credit Facility in an aggregate amount greater than $40.0 million or unreimbursed letters of credit issued under the Revolving Credit Facility are outstanding on the last day of such fiscal quarter or for more than five consecutive days during such fiscal quarter. For purposes of determining compliance with the financial covenants for any fiscal quarter, the Revolving Credit Facility provides that we may exercise an equity cure by issuing certain permitted securities for cash or otherwise recording cash contributions to our capital that will, upon the contribution of such cash to the borrower, be included in the calculation of consolidated tangible net worth and consolidated total capitalization. The equity cure right is exercisable up to twice in any
period of four consecutive fiscal quarters and up to five times overall. The Revolving Credit Facility contains certain restrictive covenants including limitations on incurrence of liens, dividends and other distributions, asset dispositions and investments in entities that are not guarantors, limitations on prepayment of subordinated indebtedness and limitations on fundamental
changes. The Revolving Credit Facility contains customary events of default, subject to applicable grace periods, including for nonpayment of principal, interest or other amounts, violation of covenants (including financial covenants, subject to the exercise of an equity cure), incorrectness of representations and warranties in any material respect, cross default and cross acceleration, bankruptcy, material monetary judgments, ERISA events with material adverse effect, actual or asserted invalidity of material guarantees and change of control.
As of December 31, 2020, we were in compliance with all of the covenants under the Revolving Credit Facility.
Mortgage Warehouse Borrowings
The following is a summary of our mortgage subsidiary warehouse borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
December 31, 2020
|
Facility
|
Amount
Drawn
|
|
Facility
Amount
|
|
Interest Rate(1)
|
|
Expiration Date
|
|
Collateral (2)
|
Warehouse A
|
$
|
40,958
|
|
|
$
|
55,000
|
|
|
LIBOR + 1.75%
|
|
On Demand
|
|
Mortgage Loans
|
Warehouse B
|
19,457
|
|
|
85,000
|
|
|
LIBOR + 1.75%
|
|
On Demand
|
|
Mortgage Loans
|
Warehouse C
|
43,148
|
|
|
75,000
|
|
|
LIBOR + 2.05%
|
|
On Demand
|
|
Mortgage Loans and Restricted Cash
|
Warehouse D
|
23,726
|
|
|
80,000
|
|
|
LIBOR + 1.65%
|
|
November 15, 2021
|
|
Mortgage Loans
|
Total
|
$
|
127,289
|
|
|
$
|
295,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Facility
|
Amount
Drawn
|
|
Facility
Amount
|
|
Interest Rate(1)
|
|
Expiration Date
|
|
Collateral (2)
|
Warehouse A
|
$
|
25,074
|
|
|
$
|
45,000
|
|
|
LIBOR + 1.75%
|
|
On Demand
|
|
Mortgage Loans
|
Warehouse B
|
38,481
|
|
|
85,000
|
|
|
LIBOR + 1.75%
|
|
On Demand
|
|
Mortgage Loans
|
Warehouse C
|
59,678
|
|
|
100,000
|
|
|
LIBOR + 1.70%
|
|
On Demand
|
|
Mortgage Loans and Restricted Cash
|
Total
|
$
|
123,233
|
|
|
$
|
230,000
|
|
|
|
|
|
|
|
(1)Subject to certain interest rate floors.
(2)The mortgage warehouse borrowings outstanding as of December 31, 2020 and 2019, are collateralized by $201.2 million and $190.9 million, respectively, of mortgage loans held for sale, which comprise the balance of mortgage receivables, and $1.3 million and $1.6 million, respectively, of cash, which is restricted cash on our balance sheet.
Loans Payable and Other Borrowings
Loans payable and other borrowings as of December 31, 2020 and 2019 consist of project-level debt due to various land sellers and seller financing notes from current and prior year acquisitions. The debt is obtained for specific communities that contain land banking, profit participation, and joint ventures. Project-level debt is generally secured by the land that was acquired and the principal payments generally coincide with corresponding project lot sales or a principal reduction schedule. Loans payable bear interest at rates that ranged from 0% to 8% at December 31, 2020 and 2019.
Future Minimum Principal Payments on Total Debt
Principal maturities of total debt for the year ended December 31, 2020 are as follows (in thousands):
|
|
|
|
|
|
(Dollars in thousands)
|
Year Ended December 31,
|
2021
|
$
|
284,826
|
|
2022
|
78,964
|
|
2023
|
421,118
|
|
2024
|
362,143
|
|
2025
|
10,090
|
|
Thereafter
|
1,768,889
|
|
Total debt
|
$
|
2,926,030
|
|
10. FAIR VALUE DISCLOSURES
We have adopted ASC Topic 820, Fair Value Measurements, for valuation of financial instruments. ASC 820 provides a framework for measuring fair value under GAAP, expands disclosures about fair value measurements, and establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the fair value hierarchy are summarized as follows:
Level 1 — Fair value is based on quoted prices for identical assets or liabilities in active markets.
Level 2 — Fair value is determined using quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active or are directly or indirectly observable.
Level 3 — Fair value is determined using one or more significant inputs that are unobservable in active markets at the measurement date, such as a pricing model, discounted cash flow, or similar technique.
The fair value of our mortgage loans held for sale is derived from negotiated rates with partner lending institutions. The fair value of derivative assets includes IRLCs and mortgage backed securities (“MBS”). The fair value of IRLCs is based on the value of the underlying mortgage loan, quoted MBS prices and the probability that the mortgage loan will fund within the terms of the IRLCs. We estimate the fair value of the forward sales commitments based on quoted MBS prices. The fair value of our mortgage warehouse borrowings and loans payable and other borrowings approximate carrying value due to their short term nature and variable interest rate terms. The fair value of our Senior Notes is derived from quoted market prices by independent dealers in markets that are not active.
As of December 31, 2020 we transferred the IRLCs from a level 2 to a level 3 as the inputs used to determine the fair value are unique to each company's portfolio and are therefore unobservable inputs in the marketplace. There were no other changes to or transfers between the levels of the fair value hierarchy for any of our financial instruments as of December 31, 2020, when compared to December 31, 2019.
The carrying value and fair value of our financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
As of December 31, 2019
|
(Dollars in thousands)
|
Level in
Fair Value
Hierarchy
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
Description:
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale
|
2
|
|
|
$
|
201,177
|
|
|
$
|
201,177
|
|
|
$
|
190,880
|
|
|
$
|
190,880
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
3
|
|
|
5,294
|
|
|
5,294
|
|
|
2,099
|
|
|
2,099
|
|
MBSs
|
2
|
|
|
(1,847)
|
|
|
(1,847)
|
|
|
(167)
|
|
|
(167)
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage warehouse borrowings
|
2
|
|
|
127,289
|
|
|
127,289
|
|
|
123,233
|
|
|
123,233
|
|
Loans payable and other borrowings
|
2
|
|
|
348,741
|
|
|
348,741
|
|
|
182,531
|
|
|
182,531
|
|
5.875% Senior Notes due 2023 (1)
|
2
|
|
|
348,700
|
|
|
371,000
|
|
|
348,133
|
|
|
378,669
|
|
5.625% Senior Notes due 2024 (1)
|
2
|
|
|
348,295
|
|
|
375,830
|
|
|
347,756
|
|
|
379,453
|
|
5.875% Senior Notes due 2027 (1)
|
2
|
|
|
494,974
|
|
|
566,650
|
|
|
494,192
|
|
|
548,870
|
|
6.625% Senior Notes due 2027 (1)
|
2
|
|
|
320,915
|
|
|
324,240
|
|
|
—
|
|
|
—
|
|
5.750% Senior Notes due 2028 (1)
|
2
|
|
|
445,555
|
|
|
509,625
|
|
|
444,927
|
|
|
491,913
|
|
5.125% Senior Notes due 2030 (1)
|
2
|
|
|
493,926
|
|
|
560,000
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Carrying value for Senior Notes, as presented, includes unamortized debt issuance costs or bond premium. Debt issuance costs are not factored into the fair value calculation for the Senior Notes.
Fair value measurements are used for inventories on a nonrecurring basis when events and circumstances indicate that their carrying value is not recoverable. The following table presents the fair value for our inventories measured at fair value on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
For the Year Ended December 31,
|
Description:
|
Level in
Fair Value
Hierarchy
|
|
2020
|
|
2019
|
Inventories
|
3
|
|
22,556
|
|
|
16,509
|
|
At December 31, 2019, the fair value of our Chicago assets held for sale and active inventories was $25.1 million,
which is excluded from the value in the table presented above.
11. INCOME TAXES
The provision for income taxes for the years ended December 31, 2020, 2019 and 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands)
|
2020
|
|
2019
|
|
2018
|
Domestic
|
$
|
74,590
|
|
|
$
|
67,358
|
|
|
$
|
37,731
|
|
Foreign
|
—
|
|
|
—
|
|
|
25,305
|
|
Total income tax provision
|
$
|
74,590
|
|
|
$
|
67,358
|
|
|
$
|
63,036
|
|
Current:
|
|
|
|
|
|
Federal
|
$
|
11,621
|
|
|
$
|
54,372
|
|
|
$
|
(10,568)
|
|
State
|
11,733
|
|
|
9,839
|
|
|
4,104
|
|
Foreign
|
—
|
|
|
—
|
|
|
25,482
|
|
Current tax provision
|
$
|
23,354
|
|
|
$
|
64,211
|
|
|
$
|
19,018
|
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
45,594
|
|
|
$
|
(1,811)
|
|
|
$
|
40,037
|
|
State
|
5,642
|
|
|
4,958
|
|
|
4,158
|
|
Foreign
|
—
|
|
|
—
|
|
|
(177)
|
|
Deferred tax provision
|
$
|
51,236
|
|
|
$
|
3,147
|
|
|
$
|
44,018
|
|
Total income tax provision
|
$
|
74,590
|
|
|
$
|
67,358
|
|
|
$
|
63,036
|
|
The components of income before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands)
|
2020
|
|
2019
|
|
2018
|
Domestic
|
$
|
324,117
|
|
|
$
|
322,272
|
|
|
$
|
271,017
|
|
Foreign
|
—
|
|
|
—
|
|
|
2,499
|
|
Income before income taxes
|
$
|
324,117
|
|
|
$
|
322,272
|
|
|
$
|
273,516
|
|
A reconciliation of the provision for income taxes and the amount computed by applying the federal statutory income tax rate of 21% to income before provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Tax at federal statutory rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
State income taxes (net of federal benefit)
|
4.6
|
|
|
3.9
|
|
|
4.4
|
|
Foreign income taxed at a different rate
|
—
|
|
|
—
|
|
|
0.5
|
|
Uncertain tax positions
|
(0.1)
|
|
|
(0.2)
|
|
|
(2.9)
|
|
Deferred tax adjustments
|
—
|
|
|
0.2
|
|
|
—
|
|
Energy tax credits
|
(2.9)
|
|
|
(4.6)
|
|
|
(1.7)
|
|
Subpart F dividend
|
—
|
|
|
—
|
|
|
1.7
|
|
Corporate reorganization/Canada unwind
|
—
|
|
|
—
|
|
|
9.3
|
|
Foreign tax credit
|
—
|
|
|
—
|
|
|
(2.4)
|
|
Disallowed compensation expense
|
0.9
|
|
|
0.3
|
|
|
(0.1)
|
|
Disallowed M&A expenses
|
2.1
|
|
|
—
|
|
|
—
|
|
Tax reform
|
—
|
|
|
—
|
|
|
(6.9)
|
|
Impact of CARES Act
|
(2.2)
|
|
|
—
|
|
|
—
|
|
Other
|
(0.4)
|
|
|
0.3
|
|
|
0.1
|
|
Effective Rate
|
23.0
|
%
|
|
20.9
|
%
|
|
23.0
|
%
|
The effective tax rate for the year ended December 31, 2020 was favorably impacted by energy tax credits and legislation enacted during the year in response to the COVID-19 pandemic. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted into law. The legislation contains a number of economic relief provisions in response to the COVID-19 pandemic, including the ability to carryback tax losses five years for losses generated in tax years 2018, 2019 and 2020. As of December 31, 2020, we recognized a tax benefit related to certain tax losses incurred by WLH which were carried back under the new tax law. We decided to pursue this elective provision of the CARES Act during the fourth quarter of 2020. The effective tax rate for the year ended December 31, 2020 was unfavorably impacted by certain expenses related to the acquisition of WLH which are not deductible for tax purposes. The impact of the non-deductible acquisition expenses is reported on the Disallowed M&A expenses line in the rate reconciliation above.
The effective tax rate for the year ended December 31, 2019 was favorably impacted by legislation enacted during that year which reinstated an income tax credit under Section 45L of the Internal Revenue Code for building energy efficient homes. The credit, which had expired for homes built through the end 2017, allowed for energy credits retroactively to home closings from 2018 and forward through 2020. Our effective tax rate for the year ended December 31, 2019 included our provisional estimate of the energy credits we expected to obtain related to homes closed during 2018 and 2019. On December 27, 2020, legislation was enacted making the energy efficient home credits available through 2021.
The effective tax rate for the year ended December 31, 2018 included the tax impact from our holding company reorganization which we implemented on October 26, 2018 in order to simplify our capital and tax structure and increase our operational flexibility. As part of the reorganization, we paid a liquidating distribution from our Canadian subsidiary, which caused the imposition of Canadian withholding taxes. The tax impact of the reorganization shown in the rate reconciliation above was partially offset by the utilization of foreign tax credits in the United States. In addition, the reorganization triggered a capital loss carryforward which is not expected to be realized, resulting in a valuation allowance. The impact of the Canadian withholding tax, capital loss carryforward and offsetting valuation allowance are reported on the Corporate reorganization/Canada unwind line in the rate reconciliation above. In addition, our effective tax rate for the year ended December 31, 2018 included our final accounting for the effects of the Tax Act which made comprehensive reforms to the United States tax code including a decrease to the corporate statutory tax rate from 35% to 21%, and a one-time mandatory deemed repatriation tax of foreign earnings at a reduced rate that may be payable over eight years. The impact of the Tax Act is reported on the Tax Reform line in the rate reconciliation above and includes our final accounting of the impacts from the write-down of our
deferred tax assets to reflect the newly enacted U.S. federal tax rate and the deemed repatriation of foreign earnings related to the sale of our Canadian business in 2015.
We have certain tax attributes available to offset the impact of future income taxes. The components of net deferred tax assets and liabilities at December 31, 2020 and 2019, consisted of timing differences related to real estate inventory impairments, expense accruals and reserves, provisions for liabilities, and net operating loss carryforwards. A summary of these components for the years ending December 31, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands)
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Real estate inventory
|
$
|
91,499
|
|
|
$
|
22,232
|
|
Accruals and reserves
|
47,536
|
|
|
39,029
|
|
Other
|
22,914
|
|
|
15,827
|
|
Net operating losses (1)
|
87,940
|
|
|
69,815
|
|
Capital loss carryforward
|
36,054
|
|
|
35,340
|
|
Total deferred tax assets
|
$
|
285,943
|
|
|
$
|
182,243
|
|
Deferred tax liabilities:
|
|
|
|
Real estate inventory, intangibles, other
|
(11,811)
|
|
|
(6,437)
|
|
Valuation allowance
|
(36,054)
|
|
|
(35,340)
|
|
Total net deferred tax assets
|
$
|
238,078
|
|
|
$
|
140,466
|
|
(1) A portion of our net operating losses is limited by Section 382 of the Internal Revenue Code, stemming from three acquisitions: 1) the 2011 acquisition of the Company by our former Principal Equityholders, 2) the 2018 acquisition of AV Homes and 3) the 2020 acquisition of William Lyon Homes. All three acquisitions were deemed to be a change in control as defined by Section 382.
On December 31, 2020 and 2019, we had a valuation allowance of $36.1 million and $35.3 million, respectively, against net deferred tax assets. The valuation allowance is the result of the 2018 corporate reorganization which triggered a capital loss carryforward which is not expected to be realized. The increase in both the capital loss carryforward and valuation allowance during the year ending December 31, 2020 resulted from a return to provision adjustment to reflect the final amount of capital loss carryforward and corresponding valuation allowance. We have approximately $292.3 million in available gross federal NOL carryforwards. Federal NOL carryforwards generated prior to January 1, 2018 may be used to offset future taxable income for a period of 20 years and begin to expire in 2029. State NOL carryforwards may be used to offset future taxable income for a period of 20 years and begin to expire in 2026. On an ongoing basis, we will continue to review all available evidence to determine if we expect to realize our deferred tax assets and federal and state NOL carryovers or if a valuation allowance is necessary.
We account for uncertain tax positions in accordance with ASC 740. ASC 740 requires a company to recognize the financial statement effect of a tax position when it is more likely than not based on the technical merits of the position that the position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to be recognized in the financial statements based upon the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Our inability to determine that a tax position meets the more-likely-than-not recognition threshold does not mean that the Internal Revenue Service (“IRS”) or any other taxing authority will disagree with the position that we have taken.
The following is a reconciliation of the total amounts of unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
(Dollars in thousands)
|
2020
|
|
2019
|
|
2018
|
Beginning of the period
|
$
|
6,158
|
|
|
$
|
7,391
|
|
|
$
|
12,936
|
|
|
|
|
|
|
|
Increases from current year acquisitions
|
—
|
|
|
—
|
|
|
4,216
|
|
Increases of prior year items
|
—
|
|
|
15
|
|
|
475
|
|
Settlement with tax authorities
|
—
|
|
|
(977)
|
|
|
—
|
|
Decreased for tax positions of prior years
|
—
|
|
|
(76)
|
|
|
(9,818)
|
|
Decreased due to statute of limitations
|
(396)
|
|
|
(195)
|
|
|
(418)
|
|
End of the period
|
$
|
5,762
|
|
|
$
|
6,158
|
|
|
$
|
7,391
|
|
The decrease in unrecognized tax benefits for the year ending December 31, 2020 was primarily the result of the lapse in the statute of limitations on certain positions. If the unrecognized tax benefits as of December 31, 2020 were to be recognized,
approximately $4.6 million would impact the effective tax rate. The amount impacting the Company’s effective rate is calculated by adding accrued interest and penalties to the gross unrecognized tax benefit and subtracting the tax benefit associated with state taxes and interest. These amounts are included in income taxes payable and as a reduction to deferred tax assets in the Consolidated Balance Sheets at December 31, 2020 and December 31, 2019.
We recognized potential penalties and interest expense on our uncertain tax positions of $0.5 million, $0.6 million, and $0.7 million for the years ended December 31, 2020, 2019, and 2018 respectively, which are included in income tax provision in the Consolidated Statements of Operations and income taxes payable in the Consolidated Balance Sheets.
We currently are under no active examinations by our major taxing authorities. The statute of limitations for our major taxing jurisdictions remains open for examination for tax years 2016 through 2020.
12. STOCKHOLDERS’ EQUITY
Capital Stock
The Company’s authorized capital stock consists of 400,000,000 shares of common stock, par value $0.00001 per share (the “Common Stock”), and 50,000,000 shares of preferred stock, par value $0.00001 per share.
Stock Repurchase Program
On December 8, 2020, we announced that our Board of Directors authorized a $100.0 million renewal of our stock repurchase program until December 31, 2021. Repurchases of our Common Stock under the program will be effected, if at all, through open market purchases, privately negotiated transactions or other transactions through December 31, 2021.
The following table summarizes share repurchase activity for the program for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands)
|
2020
|
|
2019
|
Amount available for repurchase — beginning of period
|
$
|
—
|
|
|
$
|
57,437
|
|
Additional amount authorized for repurchase(1)
|
200,000
|
|
|
100,000
|
|
Amount repurchased at cost, 5,941,324 and 8,389,348 shares as of December 31, 2020 and December 31, 2019, respectively
|
(103,332)
|
|
|
(157,437)
|
|
Amount available for repurchase — end of period
|
$
|
96,668
|
|
|
$
|
—
|
|
(1) Amount includes the $100.0 million renewal announced on December 8, 2020 in addition to our Board of Director's authorization announced on February 28, 2020 for $100.0 million renewal of our stock repurchase program. The authorization from February 28, 2020 was fully exhausted as of December 31, 2020.
Subsequent to December 31, 2020, we repurchased and settled approximately 896,000 shares of our Common Stock for approximately $22.7 million under our share repurchase program. As of February 24, 2021, we had $74.0 million of availability to repurchase shares under the program.
13. STOCK BASED COMPENSATION
Equity-Based Compensation
In April 2013, we adopted the Taylor Morrison Home Corporation 2013 Omnibus Equity Award Plan (the “Plan”). The Plan was most recently amended and restated in May 2017. The Plan provides for the grant of stock options, restricted stock units (“RSUs”), performance-based restricted stock units (“PRSUs”), and other equity-based awards deliverable in shares of our Common Stock. As of December 31, 2020, we had an aggregate of 5,838,497 shares of Common Stock available for future grants under the Plan.
The following table provides information regarding the amount and components of stock-based compensation expense, which is included in general and administrative expenses in the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Year Ended December 31,
|
2020
|
|
2019
|
|
2018
|
Restricted stock units (1) (2)
|
$
|
19,938
|
|
|
$
|
10,989
|
|
|
$
|
17,130
|
|
Stock options
|
7,085
|
|
|
3,774
|
|
|
3,994
|
|
|
|
|
|
|
|
Total stock compensation
|
$
|
27,023
|
|
|
$
|
14,763
|
|
|
$
|
21,124
|
|
(1) Includes compensation expense related to time-based restricted stock units and performance-based restricted stock units.
(2) Stock-based compensation expense in 2020 includes expense recognized for equity awards associated with the acquisition of WLH, which were converted from WLH to TMHC equity awards. An additional $5.1 million of stock based compensation expense relating to the accelerations of awards from the WLH acquisition were charged to Transaction and corporate reorganization expenses on the Consolidated Statement of Operations. Stock-based compensation expense in 2018 includes expense recognized for the acceleration of equity awards as part of the acquisition of AV Homes.
At December 31, 2020, 2019, and 2018, the aggregate unamortized value of all outstanding stock-based compensation awards was approximately $23.8 million, $20.8 million, and $20.4 million, respectively.
Stock Options — Options granted to employees generally vest and become exercisable ratably on the first, second, third, and fourth anniversary of the date of grant. Options granted to members of the Board of Directors vest and become exercisable ratably on the first, second and third anniversary of the date of grant. Vesting of the options is subject to continued employment with TMHC or continued service on the Board of Directors, through the applicable vesting dates, and options expire within ten years from the date of grant.
The following table summarizes stock option activity for the Plan for each year presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
Number of
Options
|
|
Weighted
Average
Exercise/Grant
Price
|
|
Number of
Options
|
|
Weighted
Average
Exercise/Grant
Price
|
|
Number of
Options
|
|
Weighted
Average
Exercise/Grant
Price
|
Outstanding, beginning
|
3,339,244
|
|
|
$
|
18.98
|
|
|
3,239,995
|
|
|
$
|
18.87
|
|
|
2,854,213
|
|
|
$
|
17.50
|
|
Granted(1)
|
830,306
|
|
|
21.95
|
|
|
997,924
|
|
|
18.15
|
|
|
726,473
|
|
|
23.86
|
|
Exercised(2)
|
(456,984)
|
|
|
17.91
|
|
|
(765,781)
|
|
|
17.29
|
|
|
(118,992)
|
|
|
15.85
|
|
Cancelled/forfeited(1)
|
(154,207)
|
|
|
20.93
|
|
|
(132,894)
|
|
|
19.86
|
|
|
(221,699)
|
|
|
18.71
|
|
Balance, ending
|
3,558,359
|
|
|
$
|
19.73
|
|
|
3,339,244
|
|
|
$
|
18.98
|
|
|
3,239,995
|
|
|
$
|
18.87
|
|
Options exercisable, at December 31,
|
1,719,912
|
|
|
$
|
18.73
|
|
|
1,400,974
|
|
|
$
|
19.09
|
|
|
1,537,977
|
|
|
$
|
18.80
|
|
(1) Excludes the number of options granted and canceled in the same period.
(2) Amount excludes 94,861 of options exercised relating to the acquisition of WLH.
(3) Amount excludes 214,416 of outstanding and exercisable options relating to the acquisition of WLH.
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As of December 31,
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(Dollars in thousands)
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2020
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2019
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2018
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Unamortized value of unvested stock options (net of estimated forfeitures)
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$
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6,847
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$
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6,759
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|
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$
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6,470
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Weighted-average period (in years) that expense is expected to be recognized
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2.5
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|
2.5
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|
2.5
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Weighted-average remaining contractual life (in years) for options outstanding(1)
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6.6
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|
6.9
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|
6.9
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Weighted-average remaining contractual life (in years) for options exercisable(1)
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4.9
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|
5.1
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|
5.6
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(1) Excludes number of options relating to the acquisition of WLH.
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatilities and expected term are based on the historical information of comparable publicly traded homebuilders. Due to the limited number and homogeneous nature of option holders, the expected term was evaluated using a single group. The risk-free rate is based on the U.S. Treasury yield curve for periods equivalent to the expected term of the options on the grant date. The fair value of stock option awards is recognized evenly over the vesting period of the options.
The following table summarizes the weighted-average assumptions and fair value used for stock options grants (excluding options relating to the acquisition of WLH):
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Year Ended December 31,
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2020
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2019
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2018
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Expected dividend yield
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—%
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—%
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—%
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Expected volatility
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24.19%
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19.33%
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21.31%
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Risk-free interest rate
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1.19%
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2.49%
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2.68%
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Expected term (in years)
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6.25
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6.25
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|
6.25
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Weighted average fair value of options granted during the period
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$5.89
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|
$4.69
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$6.68
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The following table provides information pertaining to the aggregate intrinsic value of options outstanding and exercisable at December 31, 2020, 2019 and 2018 (excluding options relating to the acquisition of WLH):