Taylor Morrison Home Corp - Quarter Report: 2013 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2013

OR

For the transition period from                      to                     

Commission File Number: 001-35873

TAYLOR MORRISON HOME CORPORATION

(Exact name of Registrant as specified in its Charter)

(480) 840-8100

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year—if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

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TAYLOR MORRISON HOME CORPORATION

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EXPLANATORY NOTE

The financial statements and other disclosures contained in this report include those of Taylor Morrison Home Corporation (“TMHC” or the “Company”), which is the registrant, and those of TMM Holdings Limited Partnership (“TMM Holdings”), which became the principal operating subsidiary of TMHC in a series of reorganization transactions that were completed subsequent to March 31, 2013, in connection with the initial public offering of TMHC (which was completed on April 12, 2013). Accordingly, because TMHC had no substantial assets or activities (except for activities relating to its initial public offering) as of March 31, 2013 and because the reorganization transactions had not been completed as of such date, TMHC believes it is informative to provide the financial statements and various other disclosures of TMM Holdings as of March 31, 2013 and for the quarters ended March 31, 2013 and 2012. For more information regarding the transactions described above, see Note 16, “Subsequent Events,” to the financial statements of TMM Holdings contained in this report.

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Taylor Morrison Home Corporation

Balance Sheets

(Amounts in whole dollars)

See accompanying notes to balance sheet

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TAYLOR MORRISON HOME CORPORATION

NOTES TO THE BALANCE SHEETS

1.     ORGANIZATION

Organization and Description of the Business—Taylor Morrison Home Corporation (the “Company”), a Delaware Corporation was incorporated on November 15^th, 2012 as a holding company for the purposes of facilitating an initial public offering of common stock. As of the date of the balance sheet, the Company has not engaged in any business or other activities except in connection with its formation and contemplated initial public offering. It is expected that in connection with an internal reorganization of TMM Holdings Limited Partnership (“TMM Holdings”), the limited partners of TMM will contribute their interests to a new limited partnership, TMM Holdings II Limited Partnership, formed under the laws of the Cayman Islands (“New TMM Holdings”) such that TMM and the general partner of TMM will become wholly-owned subsidiaries of New TMM Holdings. The Company will, through a series of transactions, become the sole owner of the general partner of New TMM Holdings, and the Company will use the net cash proceeds received in the initial public offering to purchase common partnership units in New TMM Holdings. The Company’s only business following the initial public offering of the Company will be to control the business and affairs of New TMM Holdings and its subsidiaries. The Company will consolidate the financial results of New TMM Holdings and its subsidiaries into the Company’s consolidated financial statements. New TMM Holdings is the ultimate parent of Taylor Morrison Communities, Inc., (“Taylor Morrison,” formerly known as Taylor Woodrow Holdings (USA), Inc.) and Monarch Corporation (“Monarch”). Taylor Morrison’s principal business is residential homebuilding and the development of lifestyle communities throughout the United States, with operations focused in Arizona, California, Colorado, Florida and Texas. Taylor Morrison’s product lines feature entry-level, move-up, and luxury homes. Monarch was founded in the province of Ontario in 1957 and is one of the oldest names in Canadian homebuilding. Its businesses concentrate on high-rise and low-rise residential construction in Ontario, Canada. Taylor Morrison and Monarch through their respective homebuilding subsidiaries are the general contractors for all of their projects and retain subcontractors for home construction and site development. In addition to homebuilding, Taylor Morrison offers financial services to its customers in the U.S. through its mortgage brokerage subsidiary, Taylor Morrison Home Funding, LLC, and title examination services in some locations in the U.S. through various joint ventures.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The accompanying balance sheet has been prepared in accordance with accounting principles generally accepted in the United States. Separate statements of income, comprehensive income and changes in stockholders equity have not been presented because there have been no significant operating activities or equity transactions of this entity other than a $1,856 ancillary payment. A separate statement of cash flows has not been presented, as the only transactions impacting such statement are fully described below.

3.     ASSETS

In 2013, the Company used its existing cash on hand along with the $85,637 borrowed from Taylor Morrison to fund the payment of certain fees related to the filing of the Company’s Registration Statement on Form S-1 resulting in a $110,566 increase in prepaids.

4.     LIABILITIES

In 2013, the Company borrowed $85,637 from Taylor Morrison, a related party, to fund the payment of certain fees related to the filing of the Company’s Registration Statement on Form S-1.

In December 2012, the Company borrowed $106,129 from Taylor Morrison, a related party, to fund the payment of certain fees related to the filing of the Company’s Registration Statement on Form S-1.

5.     STOCKHOLDERS EQUITY

The Company is authorized to issue 1,000 shares of Class A common stock, par value $0.01 per share. At November 15, 2012, 1,000 shares of Class A common stock, par value of $.01 per share, were issued for a subscription price of $1,000.

6.     SUBSEQUENT EVENTS

Refer to Footnote 16, “Subsequent Events – Reorganization Transactions” in the TMM Holdings financial statements for information regarding the Company’s April 10, 2013 initial public offering, April 9, 2013 reorganization transactions, the use of proceeds from such offering, the amendment of TMM Holdings revolving credit facility on April 12, 2013 and the April 16, 2013 issuance of $550 million aggregate principal amount of 2021 senior notes due 2021 by TMM Holdings.

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TMM Holdings Limited Partnership

Consolidated Balance Sheets

(In thousands, unaudited)

See accompanying notes.

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TMM Holdings Limited Partnership

Consolidated Statements of Operations

(in thousands except per unit data, unaudited)

See accompanying notes

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TMM Holdings Limited Partnership

Consolidated Statements of Comprehensive Income

(In thousands, unaudited)

See accompanying notes

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TMM Holdings Limited Partnership

Consolidated Statements of Equity

(In thousands, unaudited)

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TMM Holdings Limited Partnership

Consolidated Statements of Cash Flows

(In thousands, unaudited)

See accompanying notes

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TMM HOLDINGS LIMITED PARTNERSHIP

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS

Organization and Description of the Business — TMM Holdings Limited Partnership (“TMM Holdings” or the “Company”) is a British Columbia limited partnership formed in 2011 by a consortium comprised of affiliates of TPG Global, LLC (the “TPG Entities”), investment funds managed by Oaktree Capital Management, L.P. or their respective subsidiaries (the “Oaktree Entities”), and affiliates of JH Investments (the “JH Entities” and together with the TPG Entities and Oaktree Entities, the “Sponsors”). On July 13, 2011, TMM Holdings, through various wholly owned acquisition subsidiaries, acquired all of the outstanding shares of Taylor Woodrow Holdings (USA), Inc. (now known as Taylor Morrison Communities, Inc. or “Taylor Morrison”) and Monarch Corporation (“Monarch”) from Taylor Wimpey plc (“Predecessor Parent Company”) through a combination of equity and debt (the “Acquisition”). In conjunction with the Acquisition, a series of holding companies and partnerships were established to hold TMM Holdings’ investments in the acquired businesses. Taylor Morrison’s principal business is residential homebuilding and the development of life style communities throughout the United States, with operations focused in Arizona, California, Colorado, Florida, and Texas. Taylor Morrison’s product lines feature entry-level, move-up, and luxury homes. Monarch was founded in the province of Ontario in 1957 and is one of the oldest names in Canadian homebuilding. Its businesses focus on high-rise and low-rise residential construction in Ontario, Canada. Taylor Morrison and Monarch are the general contractors for all of their projects and retain subcontractors for home construction and site development. In addition to homebuilding, Taylor Morrison offers financial services to its customers in the U.S. through its mortgage brokerage subsidiary and title examination services in some U.S. locations through various joint ventures.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation — The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the consolidated and combined financial statements in our Registration Statement filing on Form S-1 (File No. 333-185269), as amended, made effective on April 10, 2013. The consolidated financial statements include the accounts of TMM Holdings, Taylor Morrison, Monarch and those of our consolidated subsidiaries, partnerships and other entities in which we have a controlling financial interest, and of variable interest entities in which we are deemed the primary beneficiary (collectively, “us”, “we”, “our” and “the Company”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying financial statements include all adjustments (consisting only of normal recurring entries), necessary for the fair presentation of our results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for the full year.

Unless otherwise stated, amounts are shown in U.S. dollars. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date, and revenues and expenses are translated at average rates of exchange prevailing during the period. Translation adjustments resulting from this process are recorded to net owners’ equity in the accompanying consolidated balance sheets and statements of equity.

Darling Acquisition

On December 31, 2012, the Company acquired certain assets and liabilities of Darling Interests, Inc. (“Darling”), a Texas based homebuilder. Darling builds homes under the Darling Homes brand for move-up buyers in the Dallas-Fort Worth Metroplex and Houston markets. The acquisition, which consists primarily of real estate inventory, enables the Company to strengthen its presence in these two Texas markets. The assets and liabilities were acquired in exchange for cash consideration of $114.8. million as well as a contingent payment of $50.0 million, plus 5% of any cumulative EBIT (earnings before interest and taxes) above $229.5 million over the four year period following December 31, 2012. A portion of the initial purchase price was financed by $50.0 million of borrowings under the Company’s Credit Facility and approximately $27.6 million was financed by the sellers. The purchase price to be allocated to the assets and liabilities acquired is as follows (in thousands):

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In connection with the purchase price allocation for the acquisition, the Company recorded (in thousands):

There is no Statement of Operations impact due to the finalization of the purchase price allocation as the preliminary purchase price allocation was recorded on the December 31, 2012 closing date; consequently no depreciation or amortization related to the purchase price allocation was recorded in 2012.

The $16.9 million of intangible assets with finite useful lives consist of $1.1 million of trade name, $13.0 million of lot option contracts and supplier relationships, $2.6 million of non-compete covenants and $0.2 million of favorable leases.

The Company valued the $50.0 million of contingent purchase price using probability weightings of the anticipated liability under four different scenarios: (1) business enterprise forecast of liability; (2) the contribution margin and earnings before income and tax estimates from a valuation income forecast; (3) alternative estimates of contribution margin and earnings before interest and taxes and (4) as if the full buy out obligation was paid to Darling. The mid point of the range of the results of these probability weighted valuations was discounted, resulting in a $8.3 million liability that is included within Loans payable and other borrowings at December 31, 2012 and March 31, 2013.

In the course of finalizing the purchase price allocation, the Company consolidated one joint venture resulting from the Darling acquisition. The final purchase price allocation yielded an $18.9 million adjustment to the non controlling interests to account for joint venture partner debts.

Additionally, the Company incurred $1.8 million of transaction costs which were recorded as Other expense in 2012. Darling’s Dallas and Houston operations will be integrated into the Company’s East Region for segment reporting purposes.

Use of Estimates — The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates include the purchase price allocations, valuation of certain real estate, valuations of the M and J Units, deferred tax assets valuation allowance and reserves for warranty and self-insured risks. Actual results could differ from those estimates.

Loans Receivable — Loans receivable consist of amounts due from land buyers and certain of our joint ventures, are generally secured by underlying land, bear interest at average interest rates of 3.4% and 5.5% as of March 31, 2013 and December 31, 2012, respectively, and mature at various dates through 2013. The Company imputes interest based on relevant market data for loans with no stated interest rate.

Other Receivables — Other receivables primarily consist of amounts due from buyers of condominiums, as well as other amounts expected to be recovered from various community development districts and utility deposits. Allowances of $1.1 million at March 31, 2013 and $1.1 million at December 31, 2012 are maintained for potential credit losses based on historical experience, present economic conditions, and other factors considered relevant by management for these receivables.

Real Estate Inventory — Inventory consists of land, land under development, homes under construction, completed homes, and model homes. Inventory is carried at cost, net of impairment charges. 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 construction costs are accumulated and charged to cost of sales at home closing using the specific identification method. Land acquisition, development, interest, taxes, overhead, and condominium construction costs are allocated to homes and units using methods that approximate the relative sales value method. These costs are capitalized to inventory from the point development begins to the point construction is completed. For those communities that have been temporarily closed or where development has been discontinued, we do not allocate interest or other costs to the community’s inventory until activity begins again. Changes in estimated costs to be incurred in a community are generally allocated to the remaining homes on a prospective basis.

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In accordance with the provisions of ASC Topic 360, Property, Plant, and Equipment, “ASC 360” we review our real estate inventory for indicators of impairment by evaluating each community during each reporting period. In conducting our review for indicators of impairment on a community level, we evaluate, among other things, the margins on homes that have been delivered, margins on homes under sales contracts in backlog, projected margins with regard to future home sales over the life of the community, projected margins with regard to future land sales and the estimated fair value of the land itself. The Company pays particular attention to communities in which inventory is moving at a slower than anticipated absorption pace and communities whose average sales price and/or margins are trending downward and are anticipated to continue to trend downward. From this review, the Company identifies communities with indicators of impairment and then performs additional analysis to determine if the carrying value exceeds the communities’ undiscounted cash flows. ASC 360 requires that companies evaluate long-lived assets that are expected to be held and used in operations, including inventories, for recoverability based on undiscounted future cash flows of the assets at the lowest level for which there are identifiable cash flows. If the carrying value of the assets exceeds their estimated undiscounted cash flows, then the assets are deemed to be impaired and are recorded at fair value as of the assessment date. The Company estimates the fair value of its communities using a discounted cash flow model. The projected cash flows for each community are significantly impacted by estimates related to market supply and demand, product type by community, homesite sizes, sales pace, sales prices, sales incentives, construction costs, sales and marketing expenses, the local economy, competitive conditions, labor costs, costs of materials and other factors for that particular community. Every division evaluates the historical performance of each of its communities, as well as current trends in the market and economy impacting the community and its surrounding areas. These trends are analyzed for each of the estimates listed above.

The Company’s projected cash flows are impacted by many assumptions. Some of the most critical assumptions in the Company’s cash flow model are the projected absorption pace for home sales, sales prices and costs to build and deliver homes on a community by community basis.

In order to arrive at the assumed absorption pace for home sales included in the Company’s cash flow model, the Company analyzes its historical absorption pace in the community as well as other comparable communities in the geographical area. In addition, the Company considers internal and external market studies and trends, which generally include, but are not limited to, statistics on population demographics, unemployment rates and availability of competing product in the geographic area where the community is located. When analyzing the Company’s historical absorption pace for home sales and corresponding internal and external market studies, the Company places greater emphasis on more current metrics and trends such as the absorption pace realized in its most recent quarters as well as forecasted population demographics, unemployment rates and availability of competing product.

In order to determine the assumed sales prices included in its cash flow models, the Company analyzes the historical sales prices realized on homes it delivered in the community and other comparable communities in the geographical area as well as the sales prices included in its current backlog for such communities. In addition, the Company considers internal and external market studies and trends, which generally include, but are not limited to, statistics on sales prices in neighboring communities and sales prices on similar products in non-neighboring communities in the geographic area where the community is located. When analyzing its historical sales prices and corresponding market studies, the Company places greater emphasis on more current metrics and trends such as future forecasted sales prices in neighboring communities as well as future forecasted sales prices for similar products in non-neighboring communities.

In order to arrive at the Company’s assumed costs to build and deliver homes, the Company generally assumes a cost structure reflecting contracts currently in place with its vendors adjusted for any anticipated cost reduction initiatives or increases in cost structure. Costs assumed in the cash flow model for the Company’s communities are generally based on the rates the Company is currently obligated to pay under existing contracts with its vendors adjusted for any anticipated cost reduction initiatives or increases in cost structure.

Since the estimates and assumptions included in the Company’s cash flow models are based upon historical results and projected trends, they do not anticipate unexpected changes in market conditions or strategies that may lead the Company to incur additional impairment charges in the future. Using all available information, the Company calculates its best estimate of projected cash flows for each community. While many of the estimates are calculated based on historical and projected trends, all estimates are subjective and change from market to market and community to community as market and economic conditions change. The determination of fair value also requires discounting the estimated cash flows at a rate the Company believes a market participant would determine to be commensurate with the inherent risks associated with the assets and related estimated cash flow streams. The discount rate used in determining each asset’s fair value depends on the community’s projected life and development stage. Inventory impairment charges are recognized against all inventory costs of a community, such as land, land improvements, cost of home construction and capitalized interest. For the three months ended March 31, 2013, and March 31, 2012, no impairment charges were identified and recorded. In certain cases, the Company may elect to stop development and/or marketing of an existing community if it believes the economic performance of the community would be maximized by deferring development for a period of time to allow market conditions to improve. The decision may be based on financial and/or operational metrics. If the Company decides to stop developing a project, it will impair such project if necessary to its fair value as discussed above and then cease future development and/or marketing activity until such a time when management believes that market conditions have improved and economic performance can be maximized. We review all communities quarterly for potential impairments.

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When the Company elects to stop development of a community, it is management’s belief that the community is affected by local market conditions that are expected to improve within the next 3 to 5 years. Therefore, a temporary postponement of construction and development is expected to yield better returns. For these communities, as well as real estate held for development or sale, management’s assessment of the carrying value of these 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. As of March 31, 2013, there were 19 inactive communities with a carrying value of $39.7 million of which $17.0 and $22.7 million is in the East and West Region, respectively. During the three months ended March 31, 2013, the Company placed 1 community into inactive status and moved 2 communities into active status.

The life cycle of a community generally ranges from three 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 lives will vary based on the size of the community, the sales absorption rate, and whether we purchased the property as raw land or finished lots. As of March 31, 2013 and 2012, we were actively selling in 173, including the acquisition of 44 communities from Darling Homes, and 124 communities, respectively.

Inventory consists of the following (in thousands):

Capitalized Interest — The Company capitalizes certain interest costs to inventory during the development and construction periods. During the three months ended March 31, 2013 and 2012 we capitalized all interest costs into real estate inventory because the levels of our active real estate inventory exceeded our debt costs. Capitalized interest is charged to cost of sales when the related inventory is delivered. Interest capitalized, incurred, and expensed is as follows (in thousands):

Interest incurred during the three months ended March 31, 2013 and 2012 was $17.2 million and $18.2 million respectively.

Land Deposits — Deposits we pay related to land options and land purchase contracts are capitalized when paid and classified as land deposits until the associated property is purchased. Deposits are recorded as a component of inventory 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 nonrefundable, deposits are charged to expense if the land acquisition process is terminated or no longer determined probable. We review the likelihood of the acquisition of contracted lots in conjunction with our periodic real estate impairment analysis.

The Company is subject to the usual obligations associated with entering into contracts, including option contracts, for the purchase, development, and sale of real estate in the routine conduct of our business. We have a number of land purchase option contracts, generally through cash deposits or letters of credit, for the right to purchase land or lots at a future point in time with predetermined terms. We do not have title to the property and the creditors generally have no recourse against us, except in Canada where sellers have full recourse under statutory regulations. Our obligations with respect to the option contracts are generally limited to the forfeiture of the related nonrefundable cash deposits and/or letters of credit. As of March 31, 2013 and December 31, 2012, we had the right to purchase approximately 6,177 and 5,013 lots under land option and land purchase contracts, respectively, which represents purchase commitments of $383.5 million and $268.0 million as of March 31, 2013 and December 31, 2012, respectively. As of March 31, 2013, we had $29.6 million in land deposits and $4.6 million in letters of credit related to land options and land purchase. As of December 31, 2012, we had $28.7 million in land deposits and $0.2 million in letters of credit related to land options and land purchase contracts.

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For the three months ended March 31, 2013 and 2012 no impairment of option deposits and capitalized pre-acquisition costs for abandoned projects was recorded. We continue to evaluate the terms of open land option and purchase contracts in light of housing market conditions and may impair option deposits and capitalized pre-acquisition costs in the future, particularly in those instances where land sellers or third-party financial entities are unwilling to renegotiate significant contract terms.

Investments in Unconsolidated Entities and Variable Interest Entities (VIEs) — In the ordinary course of business, we enter into land and lot option purchase contracts in order to procure land or lots for the construction of homes. Lot option contracts enable us to control significant lot positions with a minimal capital investment and substantially reduce the risks associated with land ownership and development. In June 2009, the FASB revised its guidance regarding the determination of a primary beneficiary of a VIE.

In accordance with ASC Topic 810, Consolidation, we have concluded that when we enter into an option or purchase agreement to acquire land or lots and pay a nonrefundable deposit, a 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. For each VIE, we assess whether we are the primary beneficiary by first determining if we have the ability to control the activities of the VIE that most significantly affect its economic performance. Such activities include, but are not limited to, the ability to determine the budget and scope of land development work, if any; the ability to control financing decisions for the VIE; the ability to acquire additional land into the VIE or dispose of land in the VIE not under contract with the Company; and the ability to change or amend the existing option contract with the VIE. If we are not able to control such activities, we are not considered the primary beneficiary of the VIE. If we do have the ability to control such activities, we will continue our analysis by determining if we are expected to absorb a potentially significant amount of the VIE’s losses or, if no party absorbs the majority of such losses, if we will potentially benefit from a significant amount of the VIE’s expected gains. 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 inventory balance in the accompanying consolidated balance sheets. We currently have no VIE’s that we consolidate. Our exposure to loss related to our option contracts with third parties and unconsolidated entities consisted of our nonrefundable option deposits totaling $29.6 million and $28.7 million, as of March 31, 2013 and December 31, 2012, respectively. Additionally, we posted $4.6 million and $0.2 million of letters of credit in lieu of cash deposits under certain option contracts as of March 31, 2013 and December 31, 2012, respectively. Creditors of these VIEs, if any, have no recourse against us.

We are also involved in several joint ventures with independent third parties for our homebuilding activities. We use the equity method of accounting for entities that we do not control or where we do not own a majority of the economic interest, but have the ability to exercise significant influence over the operating and financial policies of the investee. For those 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. For joint ventures accounted for using the equity method, our share of net earnings or losses is included in equity in net income of unconsolidated entities when earned and distributions are credited against our investment in the joint venture when received. See Note 3 for financial statement information related to unconsolidated entities.

We evaluate our investments in unconsolidated entities for indicators of impairment during each reporting period. A series of operating losses of an investee or other factors may indicate that a decrease in value of the Company’s 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.

The evaluation of the Company’s investment in unconsolidated entities includes certain critical assumptions made by management: (1) projected future distributions from the unconsolidated entities, (2) discount rates applied to the future distributions and (3) various other factors. The Company’s assumptions on the projected future distributions from the unconsolidated entities are dependent on market conditions. Specifically, distributions are dependent on cash to be generated from the sale of inventory by the unconsolidated entities. Such inventory is also reviewed for potential impairment by the unconsolidated entities. The unconsolidated entities generally use a discount rate of approximately 12-18% in their reviews for impairment, subject to the perceived risks associated with the community’s cash flow streams relative to its inventory. If a valuation adjustment is recorded by an unconsolidated entity related to its assets, the Company’s proportionate share is reflected in the equity in loss from unconsolidated entities with a corresponding decrease to its investment in unconsolidated entities.

Additionally, the Company considers 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 the Company to recover its 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 the Company believes that the decline in the fair value of the investment is temporary, then no impairment is recorded.

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Noncontrolling Interests — We consolidate joint ventures when we are the primary beneficiary. Therefore, those entities’ financial statements are consolidated in the Company’s consolidated financial statements and the other partners’ equity is recorded as noncontrolling interests.

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.” ASC 350 requires that goodwill and intangible assets that do not have finite lives not be amortized, but instead be assessed for impairment at least annually or more frequently if certain impairment indicators are present. No goodwill impairment charges were recorded in the three months ended March 31, 2013 and 2012. The Company recorded $15.0 million of goodwill related to the purchase price allocation for the Darling acquisition which closed on December 31, 2012.

Warranty Reserves:

U.S. Operations — We offer warranties on our homes that generally provide for one-year warranties to cover various defects in workmanship or materials or to cover structural construction defects. We may also offer a longer structural warranty in certain markets or to comply with regulatory requirements. 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 reserves are based on factors that include an actuarial study for structural warranty, historical and anticipated warranty claims, trends related to similar product types, number of home closings, and geographical areas. The structural warranty is carried by Beneva, a wholly owned subsidiary of Taylor Morrison. We also provide third-party warranty coverage on homes where required by Federal Housing Administration or Veterans Administration lenders.

Canadian Operations — We offer a limited warranty that generally provides for seven years of structural coverage; two years of coverage for water penetration, electrical, plumbing, heating, and exterior cladding defects; and one year of coverage for workmanship and materials. We are responsible for performing all of the work during the warranty period. As a result, warranty reserves are established as homes close in an amount estimated to be adequate to cover expected costs of materials and labor during warranty periods. The warranty reserves are determined using historical experience and trends related to similar product types, and number of home closings.

We regularly review the reasonableness and adequacy of our recorded warranty reserves and make adjustments to the balance of the preexisting reserves to reflect changes in trends and historical data as information becomes available. Warranty reserves are included in accrued expenses and other liabilities in the accompanying consolidated and combined balance sheets. A summary of changes in our self-insurance and warranty reserves is as follows (in thousands):

Revenue Recognition:

Home Sales — Revenues from home sales are recorded using the completed contract method of accounting at the time each home is delivered, title and possession are transferred to the buyer, there is no significant continuing involvement with the home, and the buyer has demonstrated sufficient initial and continuing investment in the property.

Condominium Sales — Revenues from the sale of condominium units is recognized when construction is beyond the preliminary stage, the buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit, sufficient units in the project have been sold to ensure that the property will not be converted to a rental property, the sales proceeds are collectible, and the aggregate sales proceeds and the total cost of the project can be reasonably estimated. For our Canadian high rise condominiums, these conditions are met when a certificate of occupancy has been received, all significant conditions of registration have been performed and the purchaser has the right to occupy the unit.

Land Sales — Revenues from land sales are recognized when title is transferred to the buyer, there is no significant continuing involvement, and the buyer has demonstrated sufficient initial and continuing investment in the property sold. If the buyer has not made an adequate initial or continuing investment in the property, the profit on such sales is deferred until these conditions are met.

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Financial Services Revenues — Revenues from loan origination are recognized at the time the related real estate transactions are completed, usually upon the close of escrow. All of the loans Taylor Morrison Home Funding, LLC (TMHF) originates are sold within a short period of time, generally 20 days, on a nonrecourse basis as further described in Note 13. After the loans are sold, the Company retains potential liability for possible claims by purchasers that it breached certain limited industry-standard representations and warranties in the loan sale agreement. Gains or losses from the sale of mortgages are recognized based on the difference between the selling price and carrying value of the related loans upon sale.

Deposits — Forfeited buyer deposits related to home, condominium, and land sales are recognized in other income in the accompanying consolidated statements of operations in the period in which we determine that the buyer will not complete the purchase of the property and the deposit is determined to be nonrefundable to the buyer.

Sales Discounts and Incentives — We grant our home buyers sales discounts and incentives from time to time, including cash discounts, discounts on options included in the home, option upgrades, and seller-paid financing or closing costs. Discounts are accounted for as a reduction in the sales price of the home.

Earnings per Unit — Basic earnings per unit is computed by dividing net earnings attributable to Owners by the weighted average number of common units outstanding for the period. Diluted earnings per unit reflects the potential dilution that could occur if securities or other contracts to issue partnership units were exercised or converted into partnership units that then shared in earnings of the Company.

Recently Issued Accounting Pronouncements — In April 2013, the Financial Accounting Standards Board issued ASU 2013-04, Liabilities (“ASU 2013-04”), which provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. ASU 2013-04 is effective for the Company beginning January 1, 2014. The Company does not anticipate the adoption of ASU 2013-04 to have an effect on our consolidated financial statements or disclosures.

3. INVESTMENTS IN UNCONSOLIDATED ENTITIES

We participate in a number of joint ventures with unrelated third parties. These entities are generally involved in real estate development or mortgage lending and title services. We use the equity method of accounting for our investments in unconsolidated entities, which are not VIEs and which we do not control, but normally have ownership interests up to 50%.

Summarized condensed financial information of unconsolidated entities that are accounted for by the equity method is as follows (in thousands):

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We have investments in, and advances to, a number of joint ventures with unrelated parties to develop land and to develop condominium projects, including for-sale residential units and commercial space. Some of these joint ventures develop land for the sole use of the venture participants, including us, and others develop land for sale to 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.

The investment in unconsolidated entities on the accompanying consolidated balance sheets includes the fair value adjustments as a result of purchase accounting, while the amounts in this note represent the original equity amounts. Fair value adjustments for the Company’s investment in unconsolidated entities are recorded at the consolidated level and are amortized against the Company’s share of earnings of the underlying joint ventures as the underlying joint venture assets are sold.

4. GOODWILL AND OTHER INTANGIBLE ASSETS

GOODWILL

A summary of the changes in goodwill for the quarter ended March 31, 2013 is as follows (in thousands):

INTANGIBLE ASSETS

Intangible asset consist of the following (in thousands):

Amortization expense recorded during the three months ended March 31, 2013 and 2012 was $0.9 million, and $0.3 million respectively.

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As of March 31, 2013, future amortization expense for intangible assets is estimated to be (in thousands):

5. LOANS PAYABLE AND OTHER BORROWINGS

Loans payable and other borrowings as of March 31, 2013 and December 31, 2012 consist of amounts due to land sellers and $26.0 million of debt payable to the former owners of Darling at 8.0%. See Note 2 for more information related to the Company’s December 31, 2012 acquisition of Darling. Loans payable bear interest at rates that ranged from 0% to 8% at March 31, 2013 and from 0% to 8% at December 31, 2012, and generally are secured by the land that was acquired with the loans. The Company imputes interest for loans with no stated interest rates. As of March 31, 2013 and December 31, 2012, we were in compliance with all financial covenants.

Principal maturities of loans payable and other borrowings for each of the next five years ending December 31 are as follows (in thousands):

6. DEBT

Sponsor Loan

In connection with the Acquisition in July 2011, the Company entered into a loan agreement with certain investment funds managed by Oaktree Entities and TPG Entities, providing for a $625.0 million senior unsecured loan (the “Sponsor Loan”) maturing on July 13, 2018. The Sponsor Loan was issued at a discount of 2.5% for $500.0 million of the balance and at par for the remaining $125.0 million balance. In August 2011, $125.0 million of the Sponsor Loan was repaid by Monarch from operating cash. In April 2012, in connection with the offering of the Senior Notes (as defined below), $350.0 million of the Sponsor Loan was repaid in full and the remaining $150.0 million, net of unamortized discount, was converted into additional Class A units of the Company. The remaining balance of the unamortized discount totaling $7.9 million was written off in the quarter ended June 30, 2012 as a result of the retirement of the Sponsor Loan. Amortization expense of the discount was $0.4 million the three months ending March 31, 2012 which is included in interest expense in the accompanying consolidated statements of operations. The Sponsor Loan bore a 13% annual interest rate calculated on a 360-day year. Interest amounts were paid quarterly on the final day of the period. No interest was unpaid or accrued as of March 31, 2013 and 2012. During the three months ended March 31, 2012 the Company amortized $1.8 million of deferred financing costs.

The outstanding balance of the Sponsor Loan was $0 at December 31, 2012 and March 31, 2013.

2020 Senior Notes

On April 13, 2012, we issued $550.0 million of 7.75% Senior Notes due 2020 (the “Initial Notes”) at an initial offering price of 100% of the principal amount (the “Offering”). The net proceeds from the sale of the Initial Notes were $537.4 million, net of debt issuance costs of $12.6 million, were used, in part, to repay $350.0 million of the Sponsor Loan. The remaining proceeds of approximately $187.4 million from the Offering were used by the Company for general corporate purposes. An additional $3.0 million of issuance costs were settled outside the bond proceeds.

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On August 21, 2012, the Company issued an additional $125.0 million of 7.75% Senior Notes due 2020 (the “Additional Notes” together with the Initial Notes the “Senior Notes”) at an initial offering price of 105.5% of the principal amount. The Company received $132.5 million, net of debt issuance costs of $3.1 million. The net proceeds were used for general corporate purposes. The Additional Notes issued August 21, 2012 were issued pursuant to the existing indenture dated as of April 13, 2012.

There were approximately $16.4 million in unamortized bond financing costs at March 31, 2013 related to the Senior Notes, which are included in prepaid expenses and other assets on the accompanying consolidated balance sheets. There were approximately $16.9 million in unamortized bond financing costs at December 31, 2012 related to the Senior Notes, which are included in prepaid expenses and other assets on the accompanying consolidated balance sheets. During the three months ended March 31, 2013 the Company amortized $0.5 million of deferred financing costs. There is $6.3 million of unamortized original issue premium related to the Senior Notes resulting in a $681.3 million balance at March 31, 2013.

The indenture for our Senior Notes contains covenants that limit (i) the making of investments, (ii) the payment of dividends and the redemption of equity and junior debt, (iii) the incurrence of additional indebtedness, (iv) asset dispositions, (v) mergers and similar corporate transactions, (vi) the incurrence of liens, (vii) the incurrence of prohibitions on payments and asset transfers among the issuers and restricted subsidiaries and (viii) transactions with affiliates, among other items. The most restrictive covenant of the indenture requires a fixed charge coverage ratio of 2.00 to 1.00. At March 31, 2013, the Company’s fixed charge ratio was 4.37 to 1.00.

Obligations to pay principal and interest on the Senior Notes are guaranteed by the U.S. homebuilding subsidiaries (collectively, the “Guarantor Subsidiaries”) who guarantee the Revolving Credit Facility (as defined below), each of which is directly or indirectly 100% owned by TMM Holdings. Such guarantees are full and unconditional, and joint and several. We do not provide separate financial statements of the Guarantor Subsidiaries or condensed consolidating financial information because the Senior Notes are not registered and are not subject to registration rights.

At any time prior to April 15, 2015, we are entitled to redeem up to 40% of the aggregate principal amount of the Senior Notes at a redemption price of 103.875% of the principal amount if the redemption occurs prior to April 15, 2013 or at a redemption price of 107.750% of the principal amount if the redemption occurs on or after April 15, 2013 and prior to April 15, 2015.

Refer to Footnote 16 “Subsequent Events – Use of Proceeds of the IPO” for a discussion of the company’s redemption of $189.6 million aggregate principal amount of Senior Notes.

Revolving Credit Facility

In 2011, the Company entered into a $75.0 million revolving credit facility with Credit Suisse, HSBC, and Deutsche Bank, secured by the underlying assets of the U.S. operations (the “Revolving Credit Facility”). In conjunction with the August 21, 2012 Additional Notes offering the Company exercised the accordion feature of the facility and expanded the line to $125.0 million in capacity. In December 2012, the Revolving Credit Facility was expanded to $225.0 million.

Borrowings under the Revolving Credit Facility may be made in U.S. dollars and in Canadian dollars subject to a U.S. $15.0 million sublimit and bear interest based upon either a LIBOR or CDOR interest rate option, as applicable, or a base rate or Canada prime rate option, as applicable, as selected by the borrowers plus, in each case, an applicable margin. The Revolving Credit Facility matures on July 13, 2016. The applicable margin for (a) any Eurodollar Rate Loan or CDOR Rate Loan is 3.25% per annum, payable on the last date of each applicable interest period or at the end of each three-month period if the applicable interest period is longer than three months and (b) any Base Rate Loan or Canadian Prime Rate Loan, 2.25% per annum, payable quarterly. There is a fee of 0.75% per annum on the commitment (whether drawn or undrawn), payable quarterly in arrears, and subject to a 25 basis point reduction upon the completion of the second full quarter after the closing date based upon the achievement of a specified capitalization ratio. The borrowers have the right to make “amend and extend” offers to lenders of a particular class. Of the draws made under the Revolving Credit Facility there was $88.0 million outstanding balance at March 31, 2013 and $50.0 million outstanding at December 31, 2012. In connection with the original implementation of the Revolving Credit Facility the Company capitalized $0.2 million and $2.1 million of financing fees in 2013 and 2012, respectively. The Company recorded amortization of $0.3 million and $0.2 million for the three months ended March 31, 2013 and 2012 respectively.

Under the terms of the Revolving Credit Facility, we have the ability to issue letters of credit totaling up to $125.0 million. Borrowing availability is reduced by the amount of letters of credit outstanding. As of March 31, 2013, there were $18.9 million in letters of credit outstanding under the Revolving Credit Facility.

The Revolving Credit Facility contains certain “springing” financial covenants. In the event that, either there are (a) any loans outstanding thereunder on the last day of any fiscal quarter or on more than five separate days of such fiscal quarter or (b) any unreimbursed letters of credit thereunder on the last day of such fiscal quarter or for more than five consecutive days of such fiscal quarter, we will be required to, in respect of such fiscal quarter, comply with a maximum capitalization ratio test as well as a minimum interest coverage ratio test. The maximum capitalization ratio requires a maximum ratio of 0.575 to 1.000. The ratio as calculated by the Company at March 31, 2013 was .47 to 1.000. The minimum interest coverage ratio requires a minimum ratio of 2.00 to 1.00. The ratio as calculated by the Company at March 31, 2013 was 4.33 to 1.00.

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The Revolving Credit Facility also contains customary restrictive covenants, including limitations on incurrence of indebtedness, incurrence of liens, dividends and other distributions, asset dispositions, investments, sale and leasebacks, passive holding entities with respect to TMM Holdings, Taylor Morrison Holdings, Inc., Monarch Communities Inc. and Monarch Parent Inc. and limitation on debt payments and amendments.

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, material security or intercreditor agreements or subordination provisions, and change of control. As of March 31, 2013 and December 31, 2012 we were in compliance with our financial covenants.

Refer to Note 16 “Subsequent Events – Revolving Credit Facility” for a discussion of the Company’s third amendment of the Revolving Credit Facility.

Mortgage Company Loan Facilities

TMHF, the Company’s wholly owned mortgage subsidiary, has certain outstanding facilities, as described further in Note 13, below.

Letters of Credit, Surety Bonds and Guarantees

We are committed, under various letters of credit and surety bonds, to perform certain development and construction activities and provide certain guarantees in the normal course of business. These guarantees have been made in connection with joint venture funding of our operations in Canada. Outstanding letters of credit and surety bonds under these arrangements, including our share of responsibility for arrangements with our joint ventures, totaled $203.1 million as of March 31, 2013 and $230.8 million as of December 31, 2012. Although significant development and construction activities have been completed related to these site improvements, the letters of credit and surety bonds are reduced as development and construction work is completed, but not fully released until warranty periods have expired.

Monarch is party to a credit facility with The Toronto-Dominion Bank (“TD Facility”). The TD Facility provides facilities including letters of credit of up to CAD $108.8 million or its U.S. dollar equivalent to provide letter of credit financing in support of Monarch’s projects. Under the terms of the TD Facility, the first $80.0 million drawn under the facility is secured by liens on the interests of Monarch in certain Canadian real property. Amounts drawn above CAD $80.0 million are secured with cash. There were CAD $108.8 million and CAD $102.6 million letters of credit outstanding under the TD Facility as of March 31, 2013 and December 31, 2012 respectively.

Monarch is also party to a credit facility with HSBC Bank Canada (“HSBC Facility”). The HSBC Facility provides a letter of credit facility of up to CAD $24.2 million as of March 31, 2013 in support of Monarch’s construction projects. Under the terms of the HSBC Facility, amounts drawn under this facility are secured by liens over the interests of Monarch in certain Canadian real property or cash. There were CAD $11.0 million and CAD $11.0 million letters of credit outstanding under the HSBC Facility as of March 31, 2013 and December 31, 2012 respectively.

Prior to the Acquisition, the TD Facility and the HSBC Facility were revolving. Pursuant to modifications made in connection with the Acquisition, the TD Facility and the HSBC facility are revolving, such that to the extent any letters of credit are cancelled, or have been cancelled, the size of each facility will be reduced by the amount of such cancellation.

Both the TD Facility and the HSBC Facility are 364-day facilities scheduled to expire on June 30, 2013.

7. FAIR VALUE DISCLOSURES

We have adopted ASC Topic 820 Fair Value Measurements (“ASC 820”) for valuation of our 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 in active markets for identical assets or liabilities.

Level 2 — Fair value is determined using significant observable inputs, generally either quoted prices in active markets for similar assets or liabilities, or quoted prices in markets that are not active.

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Level 3 — Fair value is determined using one or more significant input that is unobservable in active markets at the measurement date, such as a pricing model, discounted cash flow, or similar technique.

Mortgage receivables and mortgage borrowings attributable to Taylor Morrison are recorded at fair value which are considered a level 2 valuation in the hierarchy of fair value calculated using observable market information, including pricing from actual market transactions, investor commitment prices, or broker quotations. The carrying values of our mortgage receivables exceeds the face value by approximately $0.9 million and $4.6 million as of March 31, 2013 and December 31, 2012, respectively.

At March 31, 2013 and December 31, 2012, the carrying value of our loans payable and other borrowings of $256.7 million and $216.0 million, respectively, approximated fair value. The estimated fair values of our loans payable are considered a level 2 valuation in the hierarchy for fair value measurement and are based on a cash flow model discounted at market interest rates that considers the underlying risks of unsecured debt.

The fair value of our Senior Notes is considered a Level 2 valuation in the hierarchy for fair value measurement and is derived from quoted market prices by independent dealers and is as follows (in thousands):

We consider the carrying value of cash and cash equivalents, restricted cash, loans receivable, other receivables, net, accounts payable and Revolving Credit Facility Borrowings to approximate fair value due to their short-term nature.

The allocation of purchase price to the assets and liabilities related to the December 31, 2012 Darling acquisition have been recorded at fair value on a non recurring basis using significant Level 3 unobservable assumptions and valuation inputs.

8. INCOME TAXES

The effective tax rate for the three months ended March 31, 2013 and 2012 of the Company was composed of the statutory tax rates in the United States and Canada and was affected primarily by the change in valuation allowance against the net deferred tax asset, state income taxes, the recognition of previously unrecognized tax benefits, and interest relating to uncertain tax positions.

The provision for income taxes consists of the following (in thousands):

As of March 31, 2013, our cumulative gross unrecognized tax benefits were $85.7 million in the U.S. and $10.1 million in Canada and all unrecognized tax benefits, if recognized, would affect the effective tax rate. As of December 31, 2012, our cumulative gross unrecognized tax benefits were $85.7 million in the U.S. and $9.8 million in Canada. These amounts are included in income taxes payable in the accompanying consolidated balance sheets at March 31, 2013 and December 31, 2012. Total unrecognized tax benefits expected to reverse in the next 12 months is $84.1 million. Our valuation allowance against deferred tax assets was $62.9 million at March 31, 2013.

9. RELATED-PARTY TRANSACTIONS

From time to time, the Company may engage in transactions with entities that are affiliated with one or more of the Sponsors through either lending or equity ownership arrangements. We believe transactions with related parties are in the normal course of operations and are executed at arm’s length as they are entered into at terms comparable to those with unrelated third parties. There were no real estate acquisitions from such affiliates in the three months ended March 31, 2013 and 2012 respectively.

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Management and Advisory Fees — In connection with the Acquisition, affiliates of the Sponsors entered into services agreements with Taylor Morrison and Monarch relating to the provision of financial and strategic advisory services and consulting services. We paid affiliates of the Sponsors a one-time transaction fee of $13.7 million for structuring the Acquisition. In addition, we pay a monitoring fee for management services and advice. Fees for the three months ended March 31, 2013 and 2012, were $1.3 million and $1.3 million, respectively, and are included in general and administrative expense in the accompanying Consolidated Statements of Operations. Refer to Footnote 16 “Subsequent Events – Reorganization Transactions” for a discussion of the termination of management and advisory fees.

In addition, in conjunction with the formation of TMM Holdings and in connection with the Acquisition, an affiliate of JHI entered into a partnership services agreement with TMM Holdings relating to the provision of certain services to TMM Holdings. In consideration of these services, TMM Holdings granted to the JH Investments affiliate an amount of partnership interests, subject to certain terms, conditions and restrictions contained in a unit award agreement and the TMM Holdings limited partnership agreement. Refer to Footnote 16 “Subsequent Events – Reorganization Transactions” for a discussion of the termination of the JHI partnership services agreement.

Canadian Operations — Accounts receivable due from joint ventures and partners in the joint ventures was $35.4 million and $38.9 million as of March 31, 2013 and December 31, 2012, respectively. Loans receivable due from joint ventures and partners in the joint ventures was $34.8 million and $39.1 million as of March 31, 2013 and December 31, 2012, respectively.

10. EMPLOYEE BENEFIT, RETIREMENT, AND DEFERRED COMPENSATION PLANS

U. S. Operations —The Taylor Woodrow (USA) UK Supplementary Pension Plan is an unfunded, nonqualified pension plan for several individuals who transferred from our UK-related companies to the employment of Taylor Woodrow on or before October 1, 1995. The recorded obligations represent benefits accrued by these individuals for service with Taylor Woodrow prior to the employees’ participation in the U.S. pension plan minus any benefit accrued in any other pension-type benefit plans sponsored by or contributed to a Taylor Woodrow Group-related company for the period of service prior to participation in the U.S. plan. In accordance with the plan document, the participants are entitled to a fixed monthly pension and a fixed survivor benefit after the age of 65. Accumulated other comprehensive loss of $1.0 million and $1.0 million as of March 31, 2013 and December 31, 2012, respectively, and has not yet been recognized as a component of net periodic pension cost. At March 31, 2013 and December 31, 2012, we had accrued $1.9 million and $1.8 million, respectively, for our obligations under this plan.

We also maintain the Taylor Morrison Cash Balance Pension Plan (the “U.S. Cash Balance Plan”). This is a consolidated defined benefit plan arising from the 2007 merger of Taylor Woodrow and Morrison Homes, Inc. All full-time employees are eligible to participate in this plan. The percent of our contribution is based on the participant’s age and ranges from 2% to 4% of eligible compensation, plus 1% of eligible compensation over the social security wage base. We contributed to the plan $0.1 million, and $0.3 million for the three months ended March 31, 2013 and 2012, respectively. At March 31, 2013 and December 31, 2012, the unfunded status of the plan was $11.9 million and $11.9 million, respectively.

Effective December 31, 2010, the U.S. Cash Balance Plan was amended to freeze participation so that no new or reemployed employees may become participants and to freeze all future benefit accruals to existing participants.

Canadian Operations — Effective January 31, 2006, Monarch elected to convert the defined benefit provisions of the plan to defined contribution provisions for service beyond January 31, 2006. As part of this conversion, the plan members were given the option to convert their defined benefits accrued prior to February 1, 2006, to the defined contribution plan. As a result, Monarch maintains both a defined benefit plan (the “Monarch Plan”) and a defined contribution plan. Total expense for the defined contribution plan was $0.2 million and $0.2 million for the three months ended March 31, 2013 and 2012, respectively.

Our funding policy in regard to the Monarch Plan is to make contributions to our pension funds based on various actuarial cost methods as permitted by pension regulatory bodies, and Monarch is responsible to adequately fund the plan. Contributions reflect actuarial assumptions concerning future investment returns and future service benefits. Plan assets are represented primarily by Canadian and foreign equities, government and corporate bonds, debentures, and secured mortgages.

We use a December 31 measurement date for our employee benefit plan. Actuaries provide an annual estimate for the plan and perform a full valuation at least every three years to determine the actuarial present value of the accrued pension benefits.

11. OPERATING AND REPORTING SEGMENTS

In accordance with ASC Topic 280, Segment Reporting, we have ten homebuilding operating divisions which we aggregate into three reportable segments. These segments are engaged in the business of acquiring and developing land, constructing homes, marketing and selling those homes, and providing warranty and customer service. We aggregate our operating segments into a reporting segment based on similar long-term economic characteristics. The Company has no inter-segment sales, as all sales are to external customers.

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The Company capitalizes certain interest costs to inventory during the development and construction periods. Capitalized interest is charged to cost of revenue when the related inventory is delivered. In addition, we include financial services as a separate segment. Our reporting segments are as follows:

Management primarily evaluates segment performance based on segment adjusted gross margin, which is comprised of segment gross margin, as defined under U.S. GAAP, less interest amortized to cost of sales and impairments (“adjusted gross margin”). Management also reviews segment performance based on segment gross margin, which we define as homebuilding and land revenue less cost of home construction, commissions and other sales costs, land development and other land sales costs and other costs incurred by or allocated to each segment, including impairments. Each reportable segment follows the same accounting policies described in Note 2. Operating results for each segment may not be indicative of the results for such segment had it been an independent, stand-alone entity. The following is our segment information (in thousands):