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Tri Pointe Homes, Inc. - Quarter Report: 2018 September (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________________________________________ 
FORM 10-Q
_____________________________________________________________________________________________ 
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 1-35796
_____________________________________________________________________________________________ 

tphlogo.jpg 
TRI Pointe Group, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 _____________________________________________________________________________________________ 
 
Delaware
 
61-1763235
(State or other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)

_____________________________________________________________________________________________ 
19540 Jamboree Road, Suite 300
Irvine, California 92612
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (949) 438-1400
_____________________________________________________________________________________________ 
 
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  x    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
☐
Non-accelerated filer
☐ 
Smaller reporting company
☐
 
 
Emerging Growth Company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  x
142,202,313 shares of common stock were issued and outstanding as of October 15, 2018.

- 1 -


EXPLANATORY NOTE
As used in this Quarterly Report on Form 10-Q, references to “TRI Pointe”, the “Company”, “we”, “us”, or “our” (including in the consolidated financial statements and related notes thereto in this report) refer to TRI Pointe Group, Inc., a Delaware corporation (“TRI Pointe Group”) and its subsidiaries.



- 2 -


TRI POINTE GROUP, INC.
FORM 10-Q
INDEX
September 30, 2018
 
 
 
Page
Number
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 


- 2 -


PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements

TRI POINTE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
 
September 30, 2018
 
December 31, 2017
 
(unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
$
83,086

 
$
282,914

Receivables
85,026

 
125,600

Real estate inventories
3,377,735

 
3,105,553

Investments in unconsolidated entities
4,275

 
5,870

Goodwill and other intangible assets, net
160,560

 
160,961

Deferred tax assets, net
59,113

 
76,413

Other assets
107,309

 
48,070

Total assets
$
3,877,104

 
$
3,805,381

Liabilities
 
 
 
Accounts payable
$
83,711

 
$
72,870

Accrued expenses and other liabilities
313,194

 
330,882

Unsecured revolving credit facility
100,000

 
—

Senior notes, net
1,419,198

 
1,471,302

Total liabilities
1,916,103

 
1,875,054

 
 
 
 
Commitments and contingencies (Note 13)

 

 
 
 
 
Equity
 
 
 
Stockholders’ Equity:
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized; no
   shares issued and outstanding as of September 30, 2018 and
   December 31, 2017, respectively
—

 
—

Common stock, $0.01 par value, 500,000,000 shares authorized;
   142,202,313 and 151,162,999 shares issued and outstanding at
   September 30, 2018 and December 31, 2017, respectively
1,422

 
1,512

Additional paid-in capital
661,570

 
793,980

Retained earnings
1,297,405

 
1,134,230

Total stockholders’ equity
1,960,397

 
1,929,722

Noncontrolling interests
604

 
605

Total equity
1,961,001

 
1,930,327

Total liabilities and equity
$
3,877,104

 
$
3,805,381

 
See accompanying condensed notes to the unaudited consolidated financial statements.


- 3 -


TRI POINTE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Homebuilding:
 
 
 
 
 
 
 
Home sales revenue
$
771,768

 
$
648,638

 
$
2,123,135

 
$
1,609,458

Land and lot sales revenue
2,225

 
68,218

 
3,966

 
69,661

Other operations revenue
598

 
584

 
1,795

 
1,752

Total revenues
774,591

 
717,440

 
2,128,896

 
1,680,871

Cost of home sales
607,053

 
521,918

 
1,661,651

 
1,294,563

Cost of land and lot sales
2,234

 
12,001

 
4,163

 
13,299

Other operations expense
590

 
575

 
1,781

 
1,726

Sales and marketing
44,854

 
33,179

 
128,881

 
92,209

General and administrative
38,109

 
32,956

 
111,406

 
101,293

Homebuilding income from operations
81,751

 
116,811

 
221,014

 
177,781

Equity in income (loss) of unconsolidated entities
15

 
—

 
(384
)
 
1,646

Other (expense) income, net
(477
)
 
26

 
(379
)
 
147

Homebuilding income before income taxes
81,289

 
116,837

 
220,251

 
179,574

Financial Services:
 
 
 
 
 
 
 
Revenues
480

 
295

 
1,154

 
881

Expenses
125

 
82

 
391

 
233

Equity in income of unconsolidated entities
1,986

 
1,351

 
4,972

 
2,911

Financial services income before income taxes
2,341

 
1,564

 
5,735

 
3,559

Income before income taxes
83,630

 
118,401

 
225,986

 
183,133

Provision for income taxes
(19,661
)
 
(46,112
)
 
(55,457
)
 
(69,824
)
Net income
63,969

 
72,289

 
170,529

 
113,309

Net income attributable to noncontrolling interests
—

 
(25
)
 
—

 
(138
)
Net income available to common stockholders
$
63,969

 
$
72,264

 
$
170,529

 
$
113,171

Earnings per share
 

 
 

 
 
 
 
Basic
$
0.43

 
$
0.48

 
$
1.13

 
$
0.73

Diluted
$
0.43

 
$
0.48

 
$
1.13

 
$
0.73

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
147,725,074

 
151,214,744

 
150,377,472

 
155,238,206

Diluted
148,318,032

 
152,129,825

 
151,482,456

 
155,936,076

 
See accompanying condensed notes to the unaudited consolidated financial statements.


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TRI POINTE GROUP, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(in thousands, except share amounts)
 
 
Number of
Shares of Common
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Total
Stockholders'
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance at December 31, 2016
158,626,229

 
$
1,586

 
$
880,822

 
$
947,039

 
$
1,829,447

 
$
19,063

 
$
1,848,510

Net income
—

 
—

 
—

 
187,191

 
187,191

 
360

 
187,551

Shares issued under share-based awards
1,531,475

 
16

 
12,275

 
—

 
12,291

 
—

 
12,291

Minimum tax withholding paid on behalf of employees for restricted stock units
—

 
—

 
(2,896
)
 
—

 
(2,896
)
 
—

 
(2,896
)
Stock-based compensation expense
—

 
—

 
15,906

 
—

 
15,906

 
—

 
15,906

Share repurchases
(8,994,705
)
 
(90
)
 
(112,127
)
 
—

 
(112,217
)
 
—

 
(112,217
)
Distributions to noncontrolling interests, net
—

 
—

 
—

 
—

 
—

 
(1,333
)
 
(1,333
)
Net effect of consolidations, de-consolidations and other transactions
—

 
—

 
—

 
—

 
—

 
(17,485
)
 
(17,485
)
Balance at December 31, 2017
151,162,999

 
1,512

 
793,980

 
1,134,230

 
1,929,722

 
605

 
1,930,327

Cumulative effect of accounting change (Note 1)
—

 
—

 
—

 
(7,354
)
 
(7,354
)
 
—

 
(7,354
)
Net income
—

 
—

 
—

 
170,529

 
170,529

 
—

 
170,529

Shares issued under share-based awards
891,323

 
9

 
1,934

 
—

 
1,943

 
—

 
1,943

Minimum tax withholding paid on behalf of employees for restricted stock units
—

 
—

 
(6,049
)
 
—

 
(6,049
)
 
—

 
(6,049
)
Stock-based compensation expense
—

 
—

 
10,955

 
—

 
10,955

 
—

 
10,955

Share repurchases
(9,852,009
)
 
(99
)
 
(139,250
)
 
—

 
(139,349
)
 
—

 
(139,349
)
Distributions to noncontrolling interests, net
—

 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Balance at September 30, 2018
142,202,313

 
$
1,422

 
$
661,570

 
$
1,297,405

 
$
1,960,397

 
$
604

 
$
1,961,001

See accompanying condensed notes to the unaudited consolidated financial statements.




- 5 -


TRI POINTE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
170,529

 
$
113,309

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
19,581

 
2,567

Equity in income of unconsolidated entities, net
(4,588
)
 
(4,557
)
Deferred income taxes, net
19,729

 
14,559

Amortization of stock-based compensation
10,955

 
11,631

Charges for impairments and lot option abandonments
1,500

 
1,203

Changes in assets and liabilities:
 
 
 
Real estate inventories
(315,825
)
 
(401,322
)
Receivables
40,612

 
(3,263
)
Other assets
(14,486
)
 
3,894

Accounts payable
10,841

 
(6,214
)
Accrued expenses and other liabilities
(17,716
)
 
52,640

Returns on investments in unconsolidated entities, net
6,778

 
4,897

Net cash used in operating activities
(72,090
)
 
(210,656
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(24,547
)
 
(2,212
)
Proceeds from sale of property and equipment
8

 
6

Investments in unconsolidated entities
(1,812
)
 
(934
)
Net cash used in investing activities
(26,351
)
 
(3,140
)
Cash flows from financing activities:
 
 
 
Borrowings from debt
100,000

 
500,000

Repayment of debt
(57,931
)
 
(213,726
)
Debt issuance costs
—

 
(5,932
)
Distributions to noncontrolling interests
(1
)
 
(987
)
Proceeds from issuance of common stock under share-based awards
1,943

 
3,293

Minimum tax withholding paid on behalf of employees for share-based awards
(6,049
)
 
(2,896
)
Share repurchases
(139,349
)
 
(112,217
)
Net cash (used in) provided by financing activities
(101,387
)
 
167,535

Net decrease in cash and cash equivalents
(199,828
)
 
(46,261
)
Cash and cash equivalents - beginning of period
282,914

 
208,657

Cash and cash equivalents - end of period
$
83,086

 
$
162,396

 
See accompanying condensed notes to the unaudited consolidated financial statements.


- 6 -


TRI POINTE GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

1.
Organization, Basis of Presentation and Summary of Significant Accounting Policies

Organization
TRI Pointe Group is engaged in the design, construction and sale of innovative single-family attached and detached homes through its portfolio of six quality brands across eight states, including Maracay in Arizona, Pardee Homes in California and Nevada, Quadrant Homes in Washington, Trendmaker Homes in Texas, TRI Pointe Homes in California and Colorado and Winchester Homes in Maryland and Virginia.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They should be read in conjunction with our consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017. In the opinion of management, all adjustments consisting of normal recurring adjustments, necessary for a fair presentation with respect to interim financial statements, have been included. The results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year due to seasonal variations and other factors.
The consolidated financial statements include the accounts of TRI Pointe Group and its wholly owned subsidiaries, as well as other entities in which TRI Pointe Group has a controlling interest and variable interest entities (“VIEs”) in which TRI Pointe Group is the primary beneficiary.  The noncontrolling interests as of September 30, 2018 and December 31, 2017 represent the outside owners’ interests in the Company’s consolidated entities.  All significant intercompany accounts have been eliminated upon consolidation.
Use of Estimates
Our financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from our estimates.
Significant Accounting Policies Update
Revenue Recognition
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Codified as “ASC 606”). ASC 606 supersedes the revenue-recognition requirements in ASC Topic 605, Revenue Recognition, most industry-specific guidance throughout the industry topics of the accounting standards codification, and some cost guidance related to construction-type and production-type contracts. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. We have adopted and applied this updated revenue recognition policy as of January 1, 2018. See Adoption of New Accounting Standards below.
The majority of our revenue is related to fixed-price contracts to deliver completed homes to homebuyers, and to a much lesser degree, to deliver land or lots to other homebuilders or real estate developers. We generally deliver completed homes to homebuyers and land and lots to other homebuilders or real estate developers when all closing conditions are met, including the passage of title and the receipt of consideration, and the collection of associated receivables, if any, is reasonably assured. When it is determined that there are uncompleted performance obligations, the transaction price and the related profit for those uncompleted performance obligations are deferred for recognition in future periods based on the principles of ASC 606. The

- 7 -


most common examples of uncompleted performance obligations are unfinished pools or outdoor landscaping features that are unable to be completed due to weather or other circumstances.
Following the adoption of ASC 606, the timing of revenue recognition for all of our contracts remained materially consistent with our historical revenue recognition policy due to the nature of our revenue generating activities, with the most common difference under ASC 606 relating to the deferral of revenue due to these uncompleted performance obligations at the time we deliver new homes to our homebuyers.
When we enter into a contract with a homebuyer, we sometimes receive a nonrefundable deposit that is recognized as revenue under circumstances in which a contract is canceled by the homebuyer. These amounts are recognized as home sales revenue at the time a contract is canceled by the homebuyer. We have not experienced significant contract modifications impacting the timing of revenue recognition under ASC 606, nor will we be required to use estimates in the application of the core revenue recognition principles.
Real Estate Inventories and Cost of Sales
ASC 606 includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers (“Subtopic 340-40”), which requires the deferral of incremental costs of obtaining a contract with a customer. The adoption of Subtopic 340-40 impacts the timing of recognition and classification in our consolidated financial statements of certain sales office, model and other marketing related costs that we incur to obtain sales contracts from our customers. For example, we historically capitalized to inventory and amortized through cost of home sales various sales office, model and other marketing related costs with each home delivered in a community. Under Subtopic 340-40, these costs are expensed when incurred or capitalized to other assets and amortized to selling expense.
Recently Issued Accounting Standards Not Yet Adopted
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Codified as “ASC 842”), which requires an entity to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases with durations of greater than 12 months, but record expenses on the statements of operations in a manner similar to current accounting. The guidance also requires more disclosures about leases in the notes to consolidated financial statements. ASC 842 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and, at that time, we will adopt the new standard using a modified retrospective approach. We are continuing to evaluate the impact that the adoption of ASC 842 may have on our consolidated financial statements and disclosures. While the adoption of ASC 842 could have a material impact on our consolidated balance sheet, we do not expect that there will be a material impact to our consolidated statements of operations or cash flows.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment (“ASU 2017-04”), which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted, and applied prospectively. We do not expect ASU 2017-04 will have a material impact on our financial statements.
Adoption of New Accounting Standards
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. We adopted ASU 2016-15 on January 1, 2018 and our adoption did not have a material impact on our consolidated financial statements.
On January 1, 2018, we adopted ASC 606 using the modified retrospective approach applying the method of presenting the standard of ASC 606 to only those contracts not considered completed under legacy GAAP. As a result of this application of ASC 606, no prior period results have been recast and the standard has been applied prospectively as of January 1, 2018. The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet resulting from the adoption of ASC 606 was as follows (in thousands):

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Balance at December 31, 2017
 
Adjustments due to ASC 606
 
Balance at January 1, 2018
Assets
 
 
 
 
 
 
 Real estate inventories
 
$
3,105,553

 
$
(49,317
)
 
$
3,056,236

 Deferred income tax asset
 
76,413

 
2,429

 
78,842

 Other assets
 
48,070

 
39,534

 
87,604

Equity
 
 
 
 
 
 
 Retained earnings
 
1,134,230

 
(7,354
)
 
1,126,876

Our cumulative adjustment to retained earnings on January 1, 2018 related primarily to the impact of Subtopic 340-40 and the timing of recognition and classification in our consolidated financial statements of certain sales office, model and other marketing related costs that we incur to obtain sales contracts from our customers. See Significant Accounting Policies Update above.
In accordance with ASC 606 disclosure requirements, the impact of adopting ASC 606 on our consolidated statements of operations and balance sheets for the three and nine months ended September 30, 2018 were as follows (in thousands, except per share amounts):
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
 
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Statements of Operations
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 Home sales
$
771,768

 
$
771,784

 
$
(16
)
 
$
2,123,135

 
$
2,123,387

 
$
(252
)
 
 
 
 
 
 
 
 
 
 
 
 
Costs and expenses
 
 
 
 
 
 
 
 
 
 
 
 Cost of home sales
607,053

 
617,483

 
(10,430
)
 
1,661,651

 
1,689,324

 
(27,673
)
 Sales and marketing
44,854

 
38,506

 
6,348

 
128,881

 
109,346

 
19,535

 Provision for income taxes
(19,661
)
 
(18,683
)
 
978

 
(55,457
)
 
(53,518
)
 
1,939

 Net income
63,969

 
60,881

 
3,088

 
170,529

 
164,582

 
5,947

Diluted earnings per share
$
0.43

 
$
0.41

 
$
0.02

 
$
1.13

 
$
1.09

 
$
0.04

 
 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2018
 
 
 
 
 
 
 
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 Real estate inventories
$
3,377,735

 
$
3,424,468

 
$
(46,733
)
 
 
 
 
 
 
Deferred tax assets, net
59,113

 
54,750

 
4,363

 
 
 
 
 
 
 Other assets
107,309

 
63,874

 
43,435

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 Accrued expenses and other liabilities
313,194

 
313,442

 
(248
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 Retained earnings
1,297,405

 
1,296,092

 
1,313

 
 
 
 
 
 

- 9 -


Contracts with Customers
In consideration of the appropriate revenue recognition for our contracts with customers, we first assessed our ordinary operations in order to capture all revenue transactions with a counter-party appropriately considered a customer. Historically, our ordinary homebuilding revenue generating activities have included contracts with homebuyers to deliver completed homes and to a much lesser extent, contracts with other homebuilders or real estate developers to deliver land or lots in exchange for consideration. The majority of our homebuilding contracts with customers typically include a single performance obligation, which is the transfer of control of the real estate property when all closing conditions are met.
In addition to our core homebuilding operations, we undertake service operations with customers in the form of our financial services reportable segment (“TRI Pointe Solutions”), which is comprised of our mortgage financing operations, title services operations and property and casualty insurance agency operations.  Our mortgage financing operation (“TRI Pointe Connect”) can act as a preferred mortgage broker to our homebuyers in all of the markets in which we operate.  TRI Pointe Connect was formed as a joint venture with an established mortgage lender and is accounted for under the equity method of accounting.  Our title services operation (“TRI Pointe Assurance”) provides title examinations for our homebuyers in Texas, Maryland and Virginia.  TRI Pointe Assurance is a wholly owned subsidiary of TRI Pointe and acts as a title agency for First American Title Insurance Company. Our property and casualty insurance agency operations (“TRI Pointe Advantage”) is a wholly owned subsidiary of TRI Pointe that provides property and casualty insurance agency services that help facilitate the closing process in all of the markets in which we operate.
We do not currently have any long-term contracts with customers. ASC 606 provides certain practical expedients that limit some of the accounting treatments and disclosure requirements existing under this accounting standard. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Disaggregation of Revenues
We generate revenues from a mix of homebuilding operations and financial services operations. Due to the nature of our revenue generating activities, the disaggregated revenue reported on our consolidated statement of operations, in conjunction with the revenues reported in our segment disclosure, is deemed sufficient to report revenue from contracts with customers in accordance with the disaggregation disclosure requirements of ASC 606. We report total revenues in Note 2, Segment Information, which is fully comprised of our revenues from contracts with customers. While the total homebuilding revenues by segment include a mix of home sales revenue, land and lot sales revenue and other operations revenue, all material revenue amounts outside of home sales revenue are attributed to their respective homebuilding segments in the discussion below. Our consideration of disaggregated revenue consisted of a variety of facts and circumstances pertaining to our contracts with customers. These considerations included the nature, amounts, timing and other characteristics and economic factors present within each revenue line item appearing on our consolidated statement of operations. See below for further commentary regarding each of our revenue streams from contracts with customers.
Home sales revenue
We generate the majority of our total revenue from home sales, which consists of our core business operation of building and delivering completed homes to homebuyers. Included in home sales revenue are forfeited deposits, which occur when homebuyers cancel home purchase contracts that include a nonrefundable deposit. Both revenue from forfeited deposits and deferred revenue resulting from uncompleted performance obligations existing at the time we deliver new homes to our homebuyers is immaterial.
Land and lot sales revenue
Historically, we have generated land and lot sales revenue from a small number of transactions, although in some years we have realized a significant amount of revenue and gross margin. We do not expect our future land and lot sales revenue to be material, but we still consider these sales to be an ordinary part of our business, thus meeting the definition of contracts with customers. Similar to our home sales, revenue from land and lot sales is typically fully recognized when the land and lot sales transactions are consummated, at which time no further performance obligations are left to be satisfied. Some of our historical land and lot sales have included future profit participation rights. We will recognize future land and lot sales revenue in the periods in which all closing conditions are met, subject to the constraint on variable consideration related to profit participation rights, if such rights exist in the sales contract.
Other operations revenue
The majority of our other homebuilding operations revenue relates to a ground lease at our Quadrant Homes reporting segment. We are responsible for making lease payments to the land owner, and we collect sublease payments from the buyers of the buildings. This ground lease is accounted for in accordance with ASC Topic 840, Leases. We do not recognize a material profit on this ground lease.

- 10 -


Financial services revenues
TRI Pointe Solutions is a reportable segment and is comprised of our TRI Pointe Connect mortgage financing operations, TRI Pointe Assurance title services operations, and TRI Pointe Advantage property and casualty insurance agency operations.
Mortgage financing operations
TRI Pointe Connect was formed as a joint venture with an established mortgage lender and is accounted for under the equity method of accounting.  Based on our percentage stake in this joint venture, we record a percentage of income earned by TRI Pointe Connect. Revenue by TRI Pointe Connect is recognized in the period in which the home sales transactions are consummated. TRI Pointe Connect does not have a history of uncollectable amounts from these operations. TRI Pointe Connect activity appears as equity in income of unconsolidated entities under the Financial Services section of our consolidated statements of operations.
Title services operations
TRI Pointe Assurance provides title examinations for our homebuyers in Texas, Maryland and Virginia.  TRI Pointe Assurance is a wholly owned subsidiary of TRI Pointe and acts as a title agency for First American Title Insurance Company. At the time of the consummation of the home sales transactions, we recognize a percentage of revenue captured by First American Title Insurance Company. We do not have a history of uncollectable amounts from these operations. TRI Pointe Assurance revenue is included in the Financial Services section of our consolidated statements of operations.
Property and casualty insurance agency operations
TRI Pointe Advantage is a wholly owned subsidiary of TRI Pointe and provides property and casualty insurance agency services that help facilitate the closing process in all of the markets in which we operate. These operations began in February, 2018 and have not generated a material amount of revenue.  We expect revenue from these operations to increase as customers use these services to procure homeowners insurance, with further revenue potential as customers renew their insurance coverages beyond the initial coverage periods.  The total consideration for these services, including renewal options, is estimated upon the issuance of the initial insurance policy, subject to constraint. TRI Pointe Advantage revenue is included in the Financial Services section of our consolidated statements of operations.
 

2.
Segment Information
We operate two principal businesses: homebuilding and financial services.
Our homebuilding operations consist of six homebuilding brands that acquire and develop land and construct and sell single-family detached and attached homes. In accordance with ASC Topic 280, Segment Reporting, in determining the most appropriate reportable segments, we considered similar economic and other characteristics, including product types, average selling prices, gross profits, production processes, suppliers, subcontractors, regulatory environments, land acquisition results, and underlying demand and supply. Based upon these factors, our homebuilding operations are comprised of the following six reportable segments: Maracay, consisting of operations in Arizona; Pardee Homes, consisting of operations in California and Nevada; Quadrant Homes, consisting of operations in Washington; Trendmaker Homes, consisting of operations in Texas; TRI Pointe Homes, consisting of operations in California and Colorado; and Winchester Homes, consisting of operations in Maryland and Virginia.
Our TRI Pointe Solutions financial services operation is a reportable segment and is comprised of our TRI Pointe Connect mortgage financing operations, our TRI Pointe Assurance title services operations, and our TRI Pointe Advantage property and casualty insurance agency operations. For further details, see Note 1, Organization, Basis of Presentation and Summary of Significant Accounting Policies.
Corporate is a non-operating segment that develops and implements company-wide strategic initiatives and provides support to our homebuilding reporting segments by centralizing certain administrative functions, such as marketing, legal, accounting, treasury, insurance, internal audit and risk management, information technology and human resources, to benefit from economies of scale. Our Corporate non-operating segment also includes general and administrative expenses related to operating our corporate headquarters. A portion of the expenses incurred by Corporate is allocated to the homebuilding reporting segments.
The reportable segments follow the same accounting policies used for our consolidated financial statements, as described in Note 1, Organization, Basis of Presentation and Summary of Significant Accounting Policies. Operational results of each

- 11 -


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

Total revenues and income before income taxes for each of our reportable segments were as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Maracay
$
66,730

 
$
78,167

 
$
182,134

 
$
204,981

Pardee Homes
224,452

 
231,376

 
648,208

 
495,452

Quadrant Homes
66,174

 
54,781

 
193,481

 
135,599

Trendmaker Homes
78,606

 
53,787

 
197,730

 
171,615

TRI Pointe Homes
264,499

 
239,110

 
710,561

 
524,159

Winchester Homes
74,130

 
60,219

 
196,782

 
149,065

Total homebuilding revenues
774,591

 
717,440

 
2,128,896

 
1,680,871

Financial services
480

 
295

 
1,154

 
881

Total
$
775,071

 
$
717,735

 
$
2,130,050

 
$
1,681,752

 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
 
 
 
 
 
 
Maracay
$
6,260

 
$
6,431

 
$
15,665

 
$
14,429

Pardee Homes
36,087

 
82,407

 
122,195

 
128,570

Quadrant Homes
9,269

 
6,251

 
25,206

 
13,104

Trendmaker Homes
7,379

 
3,233

 
13,977

 
9,657

TRI Pointe Homes
30,945

 
24,382

 
69,651

 
39,779

Winchester Homes
4,122

 
4,284

 
9,908

 
6,903

Corporate
(12,773
)
 
(10,151
)
 
(36,351
)
 
(32,868
)
Total homebuilding income before income taxes
81,289

 
116,837

 
220,251

 
179,574

Financial services
2,341

 
1,564

 
5,735

 
3,559

Total
$
83,630

 
$
118,401

 
$
225,986

 
$
183,133

 

- 12 -


Total real estate inventories and total assets for each of our reportable segments, as of the date indicated, were as follows (in thousands):
 
September 30, 2018
 
December 31, 2017
Real estate inventories
 
 
 
Maracay
$
308,887

 
$
243,883

Pardee Homes
1,361,960

 
1,245,659

Quadrant Homes
312,645

 
257,887

Trendmaker Homes
223,576

 
204,926

TRI Pointe Homes
872,137

 
855,727

Winchester Homes
298,530

 
297,471

Total
$
3,377,735

 
$
3,105,553

 
 
 
 
Total assets
 
 
 
Maracay
$
330,998

 
$
268,866

Pardee Homes
1,450,432

 
1,346,296

Quadrant Homes
336,665

 
312,803

Trendmaker Homes
250,728

 
224,995

TRI Pointe Homes
1,069,085

 
1,062,920

Winchester Homes
324,668

 
313,921

Corporate
97,651

 
262,740

Total homebuilding assets
3,860,227

 
3,792,541

Financial services
16,877

 
12,840

Total
$
3,877,104

 
$
3,805,381



3.
Earnings Per Share
The following table sets forth the components used in the computation of basic and diluted earnings per share (in thousands, except share and per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 

 
 

 
 

 
 

Net income available to common stockholders
$
63,969

 
$
72,264

 
$
170,529

 
$
113,171

Denominator:
 

 
 

 
 

 
 

Basic weighted-average shares outstanding
147,725,074

 
151,214,744

 
150,377,472

 
155,238,206

Effect of dilutive shares:
 

 
 
 
 

 
 

Stock options and unvested restricted stock units
592,958

 
915,081

 
1,104,984

 
697,870

Diluted weighted-average shares outstanding
148,318,032

 
152,129,825

 
151,482,456

 
155,936,076

Earnings per share
 

 
 

 
 

 
 

Basic
$
0.43

 
$
0.48

 
$
1.13

 
$
0.73

Diluted
$
0.43

 
$
0.48

 
$
1.13

 
$
0.73

Antidilutive stock options and unvested restricted stock units not included in diluted earnings per share
2,008,612

 
3,406,498

 
1,280,500

 
3,710,674

  

- 13 -



4.
Receivables
Receivables consisted of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Escrow proceeds and other accounts receivable, net
$
49,738

 
$
89,783

Warranty insurance receivable (Note 13)
35,288

 
35,817

Total receivables
$
85,026

 
$
125,600


Receivables are evaluated for collectability and allowances for potential losses are established or maintained on applicable receivables when collection becomes doubtful.  Receivables were net of allowances for doubtful accounts of $540,000 and $330,000 as of September 30, 2018 and December 31, 2017, respectively.
 

5.
Real Estate Inventories
Real estate inventories consisted of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Real estate inventories owned:
 
 
 
Homes completed or under construction
$
1,190,986

 
$
793,685

Land under development
1,663,818

 
1,934,556

Land held for future development
201,108

 
138,651

Model homes
258,401

 
211,658

Total real estate inventories owned
3,314,313

 
3,078,550

Real estate inventories not owned:
 
 
 
Land purchase and land option deposits
63,422

 
27,003

Total real estate inventories not owned
63,422

 
27,003

Total real estate inventories
$
3,377,735

 
$
3,105,553

 
Homes completed or under construction is comprised of costs associated with homes in various stages of construction and includes direct construction and related land acquisition and land development costs. Land under development primarily consists of land acquisition and land development costs, which include capitalized interest and real estate taxes, associated with land undergoing improvement activity. Land held for future development principally reflects land acquisition and land development costs related to land where development activity has not yet begun or has been suspended, but is expected to occur in the future. The real estate inventories owned balance was impacted by our one-time cumulative adjustment entry resulting from the adoption of ASC 606. As a result of our cumulative adjustment, the December 31, 2017 balance decreased by $49.3 million on January 1, 2018. For further details, see Note 1, Organization, Basis of Presentation and Summary of Significant Accounting Policies.
Real estate inventories not owned represents deposits related to land purchase and land and lot option agreements as well as consolidated inventory held by variable interest entities. For further details, see Note 7, Variable Interest Entities.

- 14 -


Interest incurred, capitalized and expensed were as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Interest incurred
$
23,942

 
$
22,865

 
$
67,089

 
$
61,669

Interest capitalized
(23,942
)
 
(22,865
)
 
(67,089
)
 
(61,669
)
Interest expensed
$
—

 
$
—

 
$
—

 
$
—

Capitalized interest in beginning inventory
$
185,589

 
$
173,261

 
$
176,348

 
$
157,329

Interest capitalized as a cost of inventory
23,942

 
22,865

 
67,089

 
61,669

Interest previously capitalized as a cost of
inventory, included in cost of sales
(20,293
)
 
(15,899
)
 
(54,199
)
 
(38,771
)
Capitalized interest in ending inventory
$
189,238

 
$
180,227

 
$
189,238

 
$
180,227

 
Interest is capitalized to real estate inventory during development and other qualifying activities. During all periods presented, we capitalized all interest incurred to real estate inventory in accordance with ASC Topic 835, Interest, as our qualified assets exceeded our debt. Interest that is capitalized to real estate inventory is included in cost of home sales or cost of land and lot sales as related units or lots are delivered.  Interest that is expensed as incurred is included in other (expense) income, net.
Real Estate Inventory Impairments and Land Option Abandonments
Real estate inventory impairments and land and lot option abandonments and pre-acquisition charges consisted of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Real estate inventory impairments
$
—

 
$
—

 
$
—

 
$
267

Land and lot option abandonments and pre-acquisition charges
643

 
374

 
1,500

 
936

Total
$
643

 
$
374

 
$
1,500

 
$
1,203

 
Impairments of real estate inventory relate primarily to projects or communities that include homes completed or under construction. Within a project or community, there may be individual homes or parcels of land that are currently held for sale. Impairment charges recognized as a result of adjusting individual held-for-sale assets within a community to estimated fair value less cost to sell are also included in the total impairment charges.  
In addition to owning land and residential lots, we also have option agreements to purchase land and lots at a future date. We have option deposits and capitalized pre-acquisition costs associated with the optioned land and lots. When the economics of a project no longer support acquisition of the land or lots under option, we may elect not to move forward with the acquisition. Option deposits and capitalized pre-acquisition costs associated with the assets under option may be forfeited at that time. 
Real estate inventory impairments and land option abandonments are recorded in cost of home sales and cost of land and lot sales on the consolidated statements of operations.
  


- 15 -


6.
Investments in Unconsolidated Entities
As of September 30, 2018, we held equity investments in four active homebuilding partnerships or limited liability companies and one financial services limited liability company. Our participation in these entities may be as a developer, a builder, or an investment partner. Our ownership percentage varies from 4% to 65%, depending on the investment, with no controlling interest held in any of these investments.
Investments Held
Our cumulative investment in entities accounted for on the equity method, including our share of earnings and losses, consisted of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Limited liability company interests
$
1,563

 
$
2,687

General partnership interests
2,712

 
3,183

Total
$
4,275

 
$
5,870

Unconsolidated Financial Information
Aggregated assets, liabilities and operating results of the entities we account for as equity-method investments are provided below. Because our ownership interest in these entities varies, a direct relationship does not exist between the information presented below and the amounts that are reflected on our consolidated balance sheets as our investments in unconsolidated entities or on our consolidated statements of operations as equity in income of unconsolidated entities.
Assets and liabilities of unconsolidated entities (in thousands):
 
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
Cash
$
11,627

 
$
11,678

Receivables
3,990

 
6,564

Real estate inventories
98,961

 
99,997

Other assets
825

 
936

Total assets
$
115,403

 
$
119,175

Liabilities and equity
 
 
 
Accounts payable and other liabilities
$
9,116

 
$
12,208

Company’s equity
4,275

 
5,870

Outside interests' equity
102,012

 
101,097

Total liabilities and equity
$
115,403

 
$
119,175

 
Results of operations from unconsolidated entities (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net sales
$
6,185

 
$
5,404

 
$
19,900

 
$
15,722

Other operating expense
(2,951
)
 
(3,532
)
 
(13,510
)
 
(9,714
)
Other income
1

 
36

 
85

 
60

Net income
$
3,235

 
$
1,908

 
$
6,475

 
$
6,068

Company’s equity in income of unconsolidated entities
$
2,001

 
$
1,351

 
$
4,588

 
$
4,557

  


- 16 -


7.
Variable Interest Entities
In the ordinary course of business, we enter into land and lot option agreements in order to procure land and residential lots for future development and the construction of homes. The use of such land and lot option agreements generally allows us to reduce the risks associated with direct land ownership and development, and reduces our capital and financial commitments. Pursuant to these land and lot option agreements, we generally provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. These deposits are recorded as land purchase and land option deposits under real estate inventories not owned on the accompanying consolidated balance sheets.
We analyze each of our land and lot option agreements and other similar contracts under the provisions of ASC 810, Consolidation to determine whether the land seller is a VIE and, if so, whether we are the primary beneficiary. Although we do not have legal title to the underlying land, if we are determined to be the primary beneficiary of the VIE, we will consolidate the VIE in our financial statements and reflect its assets as real estate inventory not owned included in our real estate inventories, its liabilities as debt (nonrecourse) held by VIEs in accrued expenses and other liabilities and the net equity of the VIE owners as noncontrolling interests on our consolidated balance sheets. In determining whether we are the primary beneficiary, we consider, among other things, whether we have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. Such activities would include, among other things, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE.
Creditors of the entities with which we have land and lot option agreements have no recourse against us. The maximum exposure to loss under our land and lot option agreements is generally limited to non-refundable option deposits and any capitalized pre-acquisition costs. In some cases, we have also contracted to complete development work at a fixed cost on behalf of the land owner and budget shortfalls and savings will be borne by us. Additionally, we have entered into land banking arrangements which require us to complete development work even if we terminate the option to procure land or lots.
The following provides a summary of our interests in land and lot option agreements (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Deposits
 
Remaining
Purchase
Price
 
Consolidated
Inventory
Held by VIEs
 
Deposits
 
Remaining
Purchase
Price
 
Consolidated
Inventory
Held by VIEs
Consolidated VIEs
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Unconsolidated VIEs
35,348

 
229,219

 
N/A

 
3,418

 
112,590

 
N/A

Other land option agreements
28,074

 
503,583

 
N/A

 
23,585

 
269,349

 
N/A

Total
$
63,422

 
$
732,802

 
$
—

 
$
27,003

 
$
381,939

 
$
—

 
Unconsolidated VIEs represent land option agreements that were not consolidated because we were not the primary beneficiary. Other land option agreements were not considered VIEs.
In addition to the deposits presented in the table above, our exposure to loss related to our land and lot option contracts consisted of capitalized pre-acquisition costs of $8.9 million and $4.5 million as of September 30, 2018 and December 31, 2017, respectively. These pre-acquisition costs were included in real estate inventories as land under development on our consolidated balance sheets.  
  

8.
Goodwill and Other Intangible Assets
As of September 30, 2018 and December 31, 2017, $139.3 million of goodwill is included in goodwill and other intangible assets, net on each of the consolidated balance sheets. The Company's goodwill balance is included in the TRI Pointe Homes reporting segment in Note 2, Segment Information. 
We have two intangible assets as of September 30, 2018, comprised of an existing trade name from the acquisition of Maracay in 2006, which has a 20 year useful life, and a TRI Pointe Homes trade name resulting from the acquisition of Weyerhaeuser Real Estate Company (“WRECO”) in 2014, which has an indefinite useful life.

- 17 -


Goodwill and other intangible assets consisted of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Goodwill
$
139,304

 
$
—

 
$
139,304

 
$
139,304

 
$
—

 
$
139,304

Trade names
27,979

 
(6,723
)
 
21,256

 
27,979

 
(6,322
)
 
21,657

Total
$
167,283

 
$
(6,723
)
 
$
160,560

 
$
167,283

 
$
(6,322
)
 
$
160,961

 
The remaining useful life of our amortizing intangible asset related to the Maracay trade name was 7.4 and 8.2 years as of September 30, 2018 and December 31, 2017, respectively. The net carrying amount related to this intangible asset was $4.0 million and $4.4 million as of September 30, 2018 and December 31, 2017, respectively. Amortization expense related to this intangible asset was $134,000 for each of the three-month periods ended September 30, 2018 and 2017, respectively, and $401,000 for each of the nine-month periods ended September 30, 2018 and 2017, respectively. Amortization of this intangible was charged to sales and marketing expense.  Our $17.3 million indefinite life intangible asset related to the TRI Pointe Homes trade name is not amortizing.  All trade names are evaluated for impairment on an annual basis or more frequently if indicators of impairment exist.
Expected amortization of our intangible asset related to Maracay for the remainder of 2018, the next four years and thereafter is (in thousands):
Remainder of 2018
$
133

2019
534

2020
534

2021
534

2022
534

Thereafter
1,687

Total
$
3,956



9.
Other Assets
Other assets consisted of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Prepaid expenses
$
27,043

 
$
13,040

Refundable fees and other deposits
16,747

 
16,012

Development rights, held for future use or sale
1,741

 
2,569

Deferred loan costs - unsecured revolving credit facility
2,675

 
3,427

Operating properties and equipment, net
56,259

 
10,528

Other
2,844

 
2,494

Total
$
107,309

 
$
48,070


    Operating properties and equipment, net was impacted by our one-time cumulative adjustment resulting from the adoption of ASC 606. As a result of our cumulative adjustment, the December 31, 2017 balance increased by $39.5 million on January 1, 2018. For further details, see Note 1, Organization, Basis of Presentation and Summary of Significant Accounting Policies.



- 18 -


10.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Accrued payroll and related costs
$
28,856

 
$
36,863

Warranty reserves (Note 13)
73,995

 
69,373

Estimated cost for completion of real estate inventories
102,225

 
105,864

Customer deposits
26,811

 
19,568

Income tax liability to Weyerhaeuser
8,321

 
7,706

Accrued income taxes payable
—

 
30,672

Liability for uncertain tax positions (Note 15)
1,458

 
1,458

Accrued interest
23,146

 
11,014

Accrued insurance expense
5,444

 
1,187

Other tax liability
24,647

 
33,671

Other
18,291

 
13,506

Total
$
313,194

 
$
330,882



11.
Senior Notes and Unsecured Revolving Credit Facility
Senior Notes
The Company's outstanding senior notes (together, the "Senior Notes") consisted of the following (in thousands):
 
 
September 30, 2018
 
December 31, 2017
4.375% Senior Notes due June 15, 2019
$
392,069

 
$
450,000

4.875% Senior Notes due July 1, 2021
300,000

 
300,000

5.875% Senior Notes due June 15, 2024
450,000

 
450,000

5.250% Senior Notes due June 1, 2027
300,000

 
300,000

Discount and deferred loan costs
(22,871
)
 
(28,698
)
Total
$
1,419,198

 
$
1,471,302

 
In June 2017, TRI Pointe Group issued $300 million aggregate principal amount of 5.250% Senior Notes due 2027 (the "2027 Notes") at 100.00% of their aggregate principal amount. Net proceeds of this issuance were $296.3 million, after debt issuance costs and discounts. The 2027 Notes mature on June 1, 2027 and interest is paid semiannually in arrears on June 1 and December 1 of each year until maturity, beginning on December 1, 2017.
In May 2016, TRI Pointe Group issued $300 million aggregate principal amount of 4.875% Senior Notes due 2021 (the "2021 Notes") at 99.44% of their aggregate principal amount. Net proceeds of this issuance were $293.9 million, after debt issuance costs and discounts. The 2021 Notes mature on July 1, 2021 and interest is paid semiannually in arrears on January 1 and July 1.
TRI Pointe Group and its 100% owned subsidiary TRI Pointe Homes, Inc. ("TRI Pointe Homes") are co-issuers of the 4.375% Senior Notes due 2019 (the "2019 Notes") and the 5.875% Senior Notes due 2024 (the "2024 Notes"). The 2019 Notes were issued at 98.89% of their aggregate principal amount and the 2024 Notes were issued at 98.15% of their aggregate principal amount. The net proceeds from the offering were $861.3 million, after debt issuance costs and discounts. The 2019 Notes and 2024 Notes mature on June 15, 2019 and June 15, 2024, respectively. Interest is payable semiannually in arrears on June 15 and December 15. During the three and nine months ended September 30, 2018, respectively, we repurchased and cancelled an aggregate principal amount of $36.2 million and $57.9 million of the 2019 Notes.
As of September 30, 2018, there was $15.8 million of capitalized debt financing costs, included in senior notes, net on our consolidated balance sheet, related to the Senior Notes that will amortize over the lives of the Senior Notes. Accrued interest related to the Senior Notes was $21.9 million and $10.6 million as of September 30, 2018 and December 31, 2017, respectively.

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Unsecured Revolving Credit Facility
On June 20, 2017, the Company modified its existing unsecured revolving credit facility (the “Credit Facility”) to extend the maturity date by two years to May 18, 2021, while decreasing the total commitments under the Credit Facility to $600 million from $625 million. In addition, the Credit Facility was modified to give the Company the option to make offers to the lenders to extend the maturity date of the Credit Facility in twelve-month increments, subject to the satisfaction of certain conditions. The Credit Facility contains a sublimit of $75 million for letters of credit. The Company may borrow under the Credit Facility in the ordinary course of business to fund its operations, including its land acquisition, land development and homebuilding activities. Borrowings under the Credit Facility will be governed by, among other things, a borrowing base. Interest rates on borrowings under the Credit Facility will be based on either a daily Eurocurrency base rate or a Eurocurrency rate, in either case, plus a spread ranging from 1.25% to 2.00%, depending on the Company’s leverage ratio. As of September 30, 2018, we had $100 million outstanding under the Credit Facility and $486.8 million of availability after considering the borrowing base provisions and outstanding letters of credit.  As of September 30, 2018, there was $2.7 million of capitalized debt financing costs, included in other assets on our consolidated balance sheet, related to the Credit Facility that will amortize over the life of the Credit Facility, maturing on May 18, 2021.  Accrued interest, including loan commitment fees, related to the Credit Facility was $575,000 and $426,000 as of September 30, 2018 and December 31, 2017, respectively.
At September 30, 2018 and December 31, 2017, we had outstanding letters of credit of $13.2 million and $7.7 million, respectively.  These letters of credit were issued to secure various financial obligations.  We believe it is not probable that any outstanding letters of credit will be drawn upon.
Interest Incurred
During the three months ended September 30, 2018 and 2017, the Company incurred interest of $23.9 million and $22.9 million, respectively, related to all debt during the period.  Included in interest incurred was amortization of deferred financing and Senior Note discount costs of $2.0 million for each of the three-month periods ended September 30, 2018 and 2017, respectively. During the nine-month periods ended September 30, 2018 and 2017, the Company incurred interest of $67.1 million and $61.7 million, respectively, related to all debt during the period. Included in interest incurred was amortization of deferred financing and Senior Notes discount costs of $6.1 million and $5.6 million for the nine months ended September 30, 2018 and 2017, respectively. Accrued interest related to all outstanding debt at September 30, 2018 and December 31, 2017 was $23.1 million and $11.0 million, respectively. 
Covenant Requirements
The Senior Notes contain covenants that restrict our ability to, among other things, create liens or other encumbrances, enter into sale and leaseback transactions, or merge or sell all or substantially all of our assets. These limitations are subject to a number of qualifications and exceptions.
Under the Credit Facility, the Company is required to comply with certain financial covenants, including but not limited to (i) a minimum consolidated tangible net worth; (ii) a maximum total leverage ratio; and (iii) a minimum interest coverage ratio.
The Company was in compliance with all applicable financial covenants as of September 30, 2018 and December 31, 2017.


12.
Fair Value Disclosures
Fair Value Measurements
ASC Topic 820, Fair Value Measurements and Disclosures, defines “fair value” as the price that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date and requires assets and liabilities carried at fair value to be classified and disclosed in the following three categories:
•
Level 1—Quoted prices for identical instruments in active markets
•
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at measurement date
•
Level 3—Valuations derived from techniques where one or more significant inputs or significant value drivers are unobservable in active markets at measurement date

- 20 -


Fair Value of Financial Instruments
A summary of assets and liabilities at September 30, 2018 and December 31, 2017, related to our financial instruments, measured at fair value on a recurring basis, is set forth below (in thousands):
 
 
 
September 30, 2018
 
December 31, 2017
 
Hierarchy
 
Book Value
 
Fair Value
 
Book Value
 
Fair Value
Senior Notes (1)
Level 2
 
$
1,435,036

 
$
1,406,819

 
$
1,491,229

 
$
1,552,335

 __________
(1) 
The book value of the Senior Notes is net of discounts, excluding deferred loan costs of $15.8 million and $19.9 million as of September 30, 2018 and December 31, 2017, respectively. The estimated fair value of the Senior Notes at September 30, 2018 and December 31, 2017 is based on quoted market prices.

At September 30, 2018 and December 31, 2017, the carrying value of cash and cash equivalents, receivables and the Credit Facility approximated fair value due to their short-term nature and variable interest rate terms.
Fair Value of Nonfinancial Assets
Nonfinancial assets include items such as real estate inventories and long-lived assets that are measured at fair value on a nonrecurring basis when events and circumstances indicating the carrying value is not recoverable. The following table presents impairment charges and the remaining net fair value for nonfinancial assets that were measured during the periods presented (in thousands):
 
Nine Months Ended September 30, 2018
 
Year Ended December 31, 2017
 
Impairment
Charge
 
Fair Value
Net of
Impairment
 
Impairment
Charge
 
Fair Value
Net of
Impairment
Real estate inventories (1)
$
—

 
$
—

 
$
854

 
$
12,950

 __________
(1) Fair value of real estate inventories, net of impairment charges represents only those assets whose carrying values were adjusted to fair value in the respective periods presented. The fair value of these real estate inventories impaired was determined based on an analysis of future undiscounted net cash flows.  In the case of lots for sale, fair value was determined based on recent land and lot sales for similar assets.

13.
Commitments and Contingencies
Legal Matters
Lawsuits, claims and proceedings have been and may be instituted or asserted against us in the normal course of business, including actions brought on behalf of various classes of claimants. We are also subject to local, state and federal laws and regulations related to land development activities, house construction standards, sales practices, employment practices, environmental protection and financial services. As a result, we are subject to periodic examinations or inquiry by agencies administering these laws and regulations.
We record a reserve for potential legal claims and regulatory matters when they are probable of occurring and a potential loss is reasonably estimable. We accrue for these matters based on facts and circumstances specific to each matter and revise these estimates when necessary.  In view of the inherent difficulty of predicting outcomes of legal claims and related contingencies, we generally cannot predict their ultimate resolution, related timing or eventual loss. Accordingly, it is possible that the ultimate outcome of any matter, if in excess of a related accrual or if no accrual was made, could be material to our financial statements.  For matters as to which the Company believes a loss is probable and reasonably estimable, we had no legal reserves as of September 30, 2018 or December 31, 2017, respectively.
On April 3, 2017, Pardee Homes was named as a defendant in a lawsuit filed in San Diego County Superior Court by Scripps Health (“Scripps”) related to the April 1989 sale by Pardee Homes of real property located in Carmel Valley, California to Scripps pursuant to a purchase agreement dated December 18, 1987 (as amended, the “Purchase Agreement”). In March 2003, Scripps contacted Pardee Homes and alleged Pardee Homes had breached a covenant in the Purchase Agreement by failing to record a restriction against the development of the surrounding property then owned by Pardee Homes for medical office use. In November 2003, the parties entered into a tolling agreement, pursuant to which the parties agreed to toll any applicable statutes of limitation from November 3, 2003 until the expiration of the agreement. The tolling agreement did not revive any cause of action already time barred by a statute of limitation as of November 3, 2003. The tolling agreement was

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terminated as of February 21, 2017. Pardee Homes became an indirect, wholly owned subsidiary of TRI Pointe on July 7, 2014 in connection with TRI Pointe’s acquisition of WRECO.
We intend to vigorously defend the action, and intend to continue challenging Scripps' claims. On May 18, 2018, Pardee Homes filed a motion for summary judgment in the action, which had a rescheduled hearing date of September 28, 2018. At the hearing, the court denied the motion for summary judgment. On October 22, 2018, Pardee Homes filed with an appellate court a writ of mandate appealing the trial court's denial of the motion for summary judgment. Although we cannot predict or determine the timing or final outcome of the lawsuit or the effect that any adverse findings or determinations may have on us, we believe Scripps has no actionable claims against Pardee Homes and that this dispute will not have a material impact on our business, liquidity, financial condition and results of operations. An unfavorable determination could result in the payment by us of monetary damages, which could be significant. The complaint does not indicate the amount of relief sought, and an estimate of possible loss or range of loss cannot presently be made with respect to this matter. No reserve with respect to this matter has been recorded on our consolidated financial statements.
Warranty
Warranty reserves are accrued as home deliveries occur. Our warranty reserves on homes delivered will vary based on product type and geographic area and also depending on state and local laws. The warranty reserve is included in accrued expenses and other liabilities on our consolidated balance sheets and represents expected future costs based on our historical experience over previous years. Estimated warranty costs are charged to cost of home sales in the period in which the related home sales revenue is recognized.
We maintain general liability insurance designed to protect us against a portion of our risk of loss from warranty and construction defect-related claims. We also generally require our subcontractors and design professionals to indemnify us for liabilities arising from their work, subject to various limitations. However, such indemnity is significantly limited with respect to certain subcontractors that are added to our general liability insurance policy. 
Our warranty reserve and related estimated insurance recoveries are based on actuarial analysis that uses our historical claim and expense data, as well as industry data to estimate these overall costs and related recoveries. Key assumptions used in developing these estimates include claim frequencies, severities and resolution patterns, which can occur over an extended period of time. These estimates are subject to variability due to the length of time between the delivery of a home to a homebuyer and when a warranty or construction defect claim is made, and the ultimate resolution of such claim; uncertainties regarding such claims relative to our markets and the types of product we build; and legal or regulatory actions and/or interpretations, among other factors. Due to the degree of judgment involved and the potential for variability in these underlying assumptions, our actual future costs could differ from those estimated. There can be no assurance that the terms and limitations of the limited warranty will be effective against claims made by homebuyers, that we will be able to renew our insurance coverage or renew it at reasonable rates, that we will not be liable for damages, cost of repairs, and/or the expense of litigation surrounding possible construction defects, soil subsidence or building related claims or that claims will not arise out of uninsurable events or circumstances not covered by insurance and not subject to effective indemnification agreements with certain subcontractors.
We also record expected recoveries from insurance carriers based on actual insurance claims made and actuarially determined amounts that depend on various factors, including the above-described reserve estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Because of the inherent uncertainty and variability in these assumptions, our actual insurance recoveries could differ significantly from amounts currently estimated. Outstanding warranty insurance receivables were $35.3 million and $35.8 million as of September 30, 2018 and December 31, 2017, respectively. Warranty insurance receivables are recorded in receivables on the accompanying consolidated balance sheet.

- 22 -


Warranty reserve activity consisted of the following (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Warranty reserves, beginning of period
$
72,342

 
$
80,128

 
$
69,373

 
$
83,135

Warranty reserves accrued
6,257

 
4,448

 
17,669

 
10,122

Adjustments to pre-existing reserves
—

 
400

 
—

 
1,021

Warranty expenditures
(4,604
)
 
(4,054
)
 
(13,047
)
 
(13,356
)
Warranty reserves, end of period
$
73,995

 
$
80,922

 
$
73,995

 
$
80,922

 
Performance Bonds
We obtain surety bonds in the normal course of business to ensure completion of certain infrastructure improvements of our projects. The beneficiaries of the bonds are various municipalities. As of September 30, 2018 and December 31, 2017, the Company had outstanding surety bonds totaling $683.5 million and $627.1 million, respectively. As of September 30, 2018 and December 31, 2017, our estimated cost to complete obligations related to these surety bonds was $398.8 million and $537.4 million, respectively.

- 23 -


14.
Stock-Based Compensation
2013 Long-Term Incentive Plan
The Company’s stock compensation plan, the 2013 Long-Term Incentive Plan (the “2013 Incentive Plan”), was adopted by TRI Pointe in January 2013 and amended, with the approval of our stockholders, in 2014 and 2015. In addition, our board of directors amended the 2013 Incentive Plan in 2014 to prohibit repricing (other than in connection with any equity restructuring or any change in capitalization) of outstanding options or stock appreciation rights without stockholder approval. The 2013 Incentive Plan provides for the grant of equity-based awards, including options to purchase shares of common stock, stock appreciation rights, bonus stock, restricted stock, restricted stock units and performance awards. The 2013 Incentive Plan will automatically expire on the tenth anniversary of its effective date. Our board of directors may terminate or amend the 2013 Incentive Plan at any time, subject to any requirement of stockholder approval required by applicable law, rule or regulation.
As amended, the number of shares of our common stock that may be issued under the 2013 Incentive Plan is 11,727,833 shares. To the extent that shares of our common stock subject to an outstanding option, stock appreciation right, stock award or performance award granted under the 2013 Incentive Plan are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or the settlement of such award in cash, then such shares of our common stock generally shall again be available under the 2013 Incentive Plan. As of September 30, 2018, there were 6,453,896 shares available for future grant under the 2013 Incentive Plan.
The following table presents compensation expense recognized related to all stock-based awards (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Total stock-based compensation
$
3,765

 
$
3,887

 
$
10,955

 
$
11,631

 
Stock-based compensation is charged to general and administrative expense on the accompanying consolidated statements of operations.  As of September 30, 2018, total unrecognized stock-based compensation related to all stock-based awards was $20.7 million and the weighted average term over which the expense was expected to be recognized was 1.8 years.
Summary of Stock Option Activity
The following table presents a summary of stock option awards for the nine months ended September 30, 2018:
 
Options
 
Weighted
Average
Exercise
Price
Per Share
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
(in thousands)
Options outstanding at December 31, 2017
1,154,658

 
$
14.16

 
4.9

 
$
4,350

Granted
—

 
—

 
—

 
—

Exercised
(171,747
)
 
$
12.05

 
—

 
—

Forfeited
(29,006
)
 
$
12.73

 
—

 
—

Options outstanding at September 30, 2018
953,905

 
$
14.58

 
4.4

 
$
510

Options exercisable at September 30, 2018
953,905

 
$
14.58

 
4.4

 
$
510

 
The intrinsic value of each stock option award outstanding or exercisable is the difference between the fair market value of the Company’s common stock at the end of the period and the exercise price of each stock option award to the extent it is considered “in-the-money”. A stock option award is considered to be “in-the-money” if the fair market value of the Company’s stock is greater than the exercise price of the stock option award. The aggregate intrinsic value of options outstanding and options exercisable represents the value that would have been received by the holders of stock option awards had they exercised their stock option award on the last trading day of the period and sold the underlying shares at the closing price on that day.

Summary of Restricted Stock Unit Activity
The following table presents a summary of restricted stock units (“RSUs”) for the nine months ended September 30, 2018:

- 24 -


 
Restricted
Stock
Units
 
Weighted
Average
Grant Date
Fair Value
Per Share
 
Aggregate
Intrinsic
Value
(in thousands)
Nonvested RSUs at December 31, 2017
4,307,592

 
$
9.80

 
$
77,192

Granted
1,131,231

 
$
15.77

 
—

Vested
(1,102,727
)
 
$
12.47

 
—

Forfeited
(993,133
)
 
$
9.40

 
—

Nonvested RSUs at September 30, 2018
3,342,963

 
$
11.05

 
$
41,453

 
On April 30, 2018, the Company granted an aggregate of 40,910 RSUs to the non-employee members of its board of directors. On July 23, 2018, the Company granted 6,677 RSUs to a non-employee member of its board of directors in connection with such individual's appointment to the board of directors. These RSUs vest in their entirety on the day immediately prior to the Company's 2019 Annual Meeting of Stockholders. The fair value of each RSU granted on April 30, 2018 and July 23, 2018 was measured using a price of $17.11 and $16.37 per share, respectively, which was the closing stock price on the date of grant. Each award will be expensed on a straight-line basis over the vesting period.
On May 7, 2018 and February 22, 2018, the Company granted an aggregate of 4,258 and 633,107, respectively, of time-vested RSUs to certain employees and officers. The RSUs granted vest in equal installments annually on the anniversary of the grant date over a three year period.  The fair value of each RSU granted on May 7, 2018 and February 22, 2018 was measured using a price of $17.61 and $16.94 per share, respectively, which was the closing stock price on the date of grant. Each award will be expensed on a straight-line basis over the vesting period.

On February 22, 2018, the Company granted 184,179, 177,095, and 85,005 performance-based RSUs to the Company’s Chief Executive Officer, President, and Chief Financial Officer, respectively. These performance-based RSUs are allocated in equal parts to two separate performance metrics: (i) TSR, with vesting based on the Company’s TSR relative to its peer-group homebuilders; and (ii) earnings per share. The vesting, if at all, of these performance-based RSUs may range from 0% to 100% and will be based on the Company’s percentage attainment of specified threshold, target and maximum performance goals. The performance period for these performance-based RSUs is January 1, 2018 to December 31, 2020. The fair value of the performance-based RSUs related to the TSR metric was determined to be $10.97 per share based on a Monte Carlo simulation. The fair value of the performance-based RSUs related to the earnings per share goal was measured using a price of $16.94 per share, which was the closing stock price on the date of grant. Each award will be expensed over the requisite service period.

On February 15, 2018, the Compensation Committee of our Board of Directors certified the performance achieved with respect to performance-based RSUs granted to the Company’s Chief Executive Officer, President, and Chief Financial Officer in 2015 that resulted in the issuance of 197,898 shares of our common stock under the 2013 Incentive Plan. The vesting of these performance-based RSUs are included in the table above. RSUs that were forfeited, as reflected in the table above, during the nine months ended September 30, 2018 included performance-based RSUs and time-based RSUs that were forfeited for no consideration.
On February 27, 2017, the Company granted an aggregate of 990,279 time-vested RSUs to certain employees and officers. The RSUs granted vest in equal installments annually on the anniversary of the grant date over a three year period.  The fair value of each RSU granted on February 27, 2017 was measured using a price of $12.10 per share, which was the closing stock price on the date of grant. Each award was expensed on a straight-line basis over the vesting period.

On February 27, 2017, the Company granted 257,851, 247,933 and 119,008 performance-based RSUs to the Company’s Chief Executive Officer, President, and Chief Financial Officer, respectively. These performance-based RSUs are allocated in equal parts to two separate performance metrics: (i) TSR, with vesting based on the Company’s TSR relative to its peer-group homebuilders; and (ii) earnings per share. The vesting, if at all, of these performance-based RSUs may range from 0% to 100% and will be based on the Company’s percentage attainment of specified threshold, target and maximum performance goals. The performance period for these performance-based RSUs is January 1, 2017 to December 31, 2019. The fair value of the performance-based RSUs related to the TSR metric was determined to be $6.16 per share based on a Monte Carlo simulation. The fair value of the performance-based RSUs related to the earnings per share goal was measured using a price of $12.10 per share, which was the closing stock price on the date of grant. Each award will be expensed over the requisite service period.


- 25 -


On May 30, 2017, the Company granted an aggregate of 55,865 RSUs to the non-employee members of its board of directors. These RSUs vested in their entirety on the day immediately prior to the Company's 2018 Annual Meeting of Stockholders. The fair value of each RSU granted on May 30, 2017 was measured using a price of $12.53 per share, which was the closing stock price on the date of grant. Each award was expensed on a straight-line basis over the vesting period.
As RSUs vest for employees, a portion of the shares awarded is generally withheld to cover employee tax withholdings. As a result, the number of RSUs vested and the number of shares of TRI Pointe common stock issued will differ.

15.
Income Taxes
We account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”), which requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statements and tax bases of assets and liabilities using enacted tax rates for the years in which taxes are expected to be paid or recovered.  Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable under ASC 740.  We are required to establish a valuation allowance for any portion of the asset we conclude is more likely than not to be unrealizable.  Our assessment considers, among other things, the nature, frequency and severity of our current and cumulative losses, forecasts of our future taxable income, the duration of statutory carryforward periods and tax planning alternatives.
We had net deferred tax assets of $59.1 million and $76.4 million as of September 30, 2018 and December 31, 2017, respectively.  We had a valuation allowance related to those net deferred tax assets of $3.5 million as of both September 30, 2018 and December 31, 2017.  The Company will continue to evaluate both positive and negative evidence in determining the need for a valuation allowance against its deferred tax assets. Changes in positive and negative evidence, including differences between the Company's future operating results and the estimates utilized in the determination of the valuation allowance, could result in changes in the Company's estimate of the valuation allowance against its deferred tax assets. The accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on the Company's consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation allowance against the Company's deferred tax assets.
TRI Pointe has certain liabilities with Weyerhaeuser Company (“Weyerhaeuser”) related to a tax sharing agreement.  As of September 30, 2018 and December 31, 2017, we had an income tax liability to Weyerhaeuser of $8.3 million and $7.7 million, respectively. The income tax liability to Weyerhaeuser is recorded in accrued expenses and other liabilities on the accompanying consolidated balance sheets.
Our provision for income taxes totaled $19.7 million and $46.1 million for the three months ended September 30, 2018 and 2017, respectively. Our provision for income taxes totaled $55.5 million and $69.8 million for the nine months ended September 30, 2018 and 2017, respectively. The Company classifies any interest and penalties related to income taxes assessed by jurisdiction as part of income tax expense.  The Company had $1.5 million of uncertain tax positions recorded as of both September 30, 2018 and December 31, 2017.  The Company has not been assessed interest or penalties by any major tax jurisdictions related to prior years. 
On December 22, 2017, the Tax Cuts and Jobs Act was enacted, reducing the U.S. federal corporate income tax rate from 35% to 21%, among other changes. In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the income tax effects of the Tax Cuts and Jobs Act, for which the accounting under ASC 740 is incomplete. As of September 30, 2018, we have completed our accounting for the tax effects of the Tax Cuts and Jobs Act, however, as there is some uncertainty around the grandfathering provisions related to performance-based executive compensation, we have estimated a provisional amount for the deferred tax assets related to performance-based executive compensation. In addition, we also remeasured the applicable deferred tax assets and liabilities based on the rate at which they are expected to reverse in the future, which is generally 21%. We are still analyzing certain aspects of the Tax Cuts and Jobs Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. In the quarter ended December 31, 2017, the Company recorded an income tax charge of $22.0 million related to the re-measurement of our deferred tax assets related to the Tax Cuts and Jobs Act. The Company recorded a discrete tax benefit of $714,000 for the three months ended September 30, 2018 related to re-measurement of our deferred tax assets related to Tax Cuts and Jobs Act due to favorable provision to return adjustments upon filing of the federal consolidated tax return.
  
16.
Related Party Transactions
We had no related party transactions for the nine months ended September 30, 2018 and 2017.

- 26 -



17.
Supplemental Disclosure to Consolidated Statements of Cash Flows
The following are supplemental disclosures to the consolidated statements of cash flows (in thousands):
 
Nine Months Ended September 30,
 
2018
 
2017
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest, net of amounts capitalized of $48,862 and $61,669
$
—

 
$
—

Income taxes
$
81,417

 
$
44,784

Supplemental disclosures of noncash activities:
 
 
 
Amortization of senior note discount capitalized to real estate inventory
$
1,738

 
$
1,525

Increase in other assets related to adoption of ASC 606
$
39,534

 
$
—

Amortization of deferred loan costs capitalized to real estate inventory
$
4,841

 
$
4,105

Effect of net consolidation and de-consolidation of variable interest entities:
 
 
 
Decrease in consolidated real estate inventory not owned
$
—

 
$
(14,660
)
Decrease in noncontrolling interests
$
—

 
$
14,660

  
18.
Supplemental Guarantor Information
2021 Notes and 2027 Notes
On May 26, 2016, TRI Pointe Group issued the 2021 Notes. On June 5, 2017, TRI Pointe Group issued the 2027 Notes. All of TRI Pointe Group’s 100% owned subsidiaries that are guarantors (each a “Guarantor” and, collectively, the “Guarantors”) of the Credit Facility, including TRI Pointe Homes, are party to supplemental indentures pursuant to which they jointly and severally guarantee TRI Pointe Group’s obligations with respect to the 2021 Notes and the 2027 Notes. Each Guarantor of the 2021 Notes and the 2027 Notes is 100% owned by TRI Pointe Group, and all guarantees are full and unconditional, subject to customary exceptions pursuant to the indentures governing the 2021 Notes and the 2027 Notes, as described in the following paragraph. All of our non-Guarantor subsidiaries have nominal assets and operations and are considered minor, as defined in Rule 3-10(h) of Regulation S-X. In addition, TRI Pointe Group has no independent assets or operations, as defined in Rule 3-10(h) of Regulation S-X. There are no significant restrictions upon the ability of TRI Pointe Group or any Guarantor to obtain funds from any of their respective wholly owned subsidiaries by dividend or loan. None of the assets of our subsidiaries represent restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X.
A Guarantor of the 2021 Notes and the 2027 Notes shall be released from all of its obligations under its guarantee if (i) all of the assets of the Guarantor have been sold; (ii) all of the equity interests of the Guarantor held by TRI Pointe Group or a subsidiary thereof have been sold; (iii) the Guarantor merges with and into TRI Pointe Group or another Guarantor, with TRI Pointe Group or such other Guarantor surviving the merger; (iv) the Guarantor is designated “unrestricted” for covenant purposes; (v) the Guarantor ceases to guarantee any indebtedness of TRI Pointe Group or any other Guarantor which gave rise to such Guarantor guaranteeing the 2021 Notes or the 2027 Notes; (vi) TRI Pointe Group exercises its legal defeasance or covenant defeasance options; or (vii) all obligations under the applicable supplemental indenture are discharged.
2019 Notes and 2024 Notes
TRI Pointe Group and TRI Pointe Homes are co-issuers of the 2019 Notes and the 2024 Notes. All of the Guarantors (other than TRI Pointe Homes) have entered into supplemental indentures pursuant to which they jointly and severally guarantee the obligations of TRI Pointe Group and TRI Pointe Homes with respect to the 2019 Notes and the 2024 Notes. Each Guarantor of the 2019 Notes and the 2024 Notes is 100% owned by TRI Pointe Group and TRI Pointe Homes, and all guarantees are full and unconditional, subject to customary exceptions pursuant to the indentures governing the 2019 Notes and the 2024 Notes, as described below.
A Guarantor of the 2019 Notes and the 2024 Notes shall be released from all of its obligations under its guarantee if (i) all of the assets of the Guarantor have been sold; (ii) all of the equity interests of the Guarantor held by TRI Pointe or a subsidiary thereof have been sold; (iii) the Guarantor merges with and into TRI Pointe or another Guarantor, with TRI Pointe or such other Guarantor surviving the merger; (iv) the Guarantor is designated “unrestricted” for covenant purposes; (v) the Guarantor ceases to guarantee any indebtedness of TRI Pointe or any other Guarantor which gave rise to such Guarantor

- 27 -


guaranteeing the 2019 Notes and 2024 Notes; (vi) TRI Pointe exercises its legal defeasance or covenant defeasance options; or (vii) all obligations under the applicable indenture are discharged.
Presented below are the condensed consolidating balance sheets at September 30, 2018 and December 31, 2017, condensed consolidating statements of operations for the three and nine months ended September 30, 2018 and 2017 and condensed consolidating statement of cash flows for the nine months ended September 30, 2018 and 2017.  Because TRI Pointe’s non-Guarantor subsidiaries are considered minor, as defined in Rule 3-10(h) of Regulation S-X, the non-Guarantor subsidiaries’ information is not separately presented in the tables below, but is included with the Guarantors. Additionally, because TRI Pointe Group has no independent assets or operations, as defined in Rule 3-10(h) of Regulation S-X, the condensed consolidated financial information of TRI Pointe Group and TRI Pointe Homes, the co-issuers of the 2019 Notes and 2024 Notes, is presented together in the column titled “Issuer”.
Condensed Consolidating Balance Sheet (in thousands):
 
 
September 30, 2018
 
Issuer
 
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
TRI Pointe
Group, Inc.
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
20,230

 
$
62,856

 
$
—

 
$
83,086

Receivables
33,924

 
51,102

 
—

 
85,026

Intercompany receivables
906,894

 
—

 
(906,894
)
 
—

Real estate inventories
872,137

 
2,505,598

 
—

 
3,377,735

Investments in unconsolidated entities
—

 
4,275

 
—

 
4,275

Goodwill and other intangible assets, net
156,604

 
3,956

 
—

 
160,560

Investments in subsidiaries
1,577,561

 
—

 
(1,577,561
)
 
—

Deferred tax assets, net
13,320

 
45,793

 
—

 
59,113

Other assets
8,833

 
98,476

 
—

 
107,309

Total assets
$
3,589,503

 
$
2,772,056

 
$
(2,484,455
)
 
$
3,877,104

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Accounts payable
$
13,533

 
$
70,178

 
$
—

 
$
83,711

Intercompany payables
—

 
906,894

 
(906,894
)
 
—

Accrued expenses and other liabilities
96,375

 
216,819

 
—

 
313,194

Unsecured revolving credit facility
100,000

 
—

 
—

 
100,000

Senior notes
1,419,198

 
—

 
—

 
1,419,198

Total liabilities
1,629,106

 
1,193,891

 
(906,894
)
 
1,916,103

 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
Total stockholders’ equity
1,960,397

 
1,577,561

 
(1,577,561
)
 
1,960,397

Noncontrolling interests
—

 
604

 
—

 
604

Total equity
1,960,397

 
1,578,165

 
(1,577,561
)
 
1,961,001

Total liabilities and equity
$
3,589,503

 
$
2,772,056

 
$
(2,484,455
)
 
$
3,877,104




- 28 -


Condensed Consolidating Balance Sheet (in thousands):
 
 
December 31, 2017
 
Issuer
 
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
TRI Pointe
Group, Inc.
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
176,684

 
$
106,230

 
$
—

 
$
282,914

Receivables
56,021

 
69,579

 
—

 
125,600

Intercompany receivables
794,550

 
—

 
(794,550
)
 
—

Real estate inventories
855,727

 
2,249,826

 
—

 
3,105,553

Investments in unconsolidated entities
—

 
5,870

 
—

 
5,870

Goodwill and other intangible assets, net
156,604

 
4,357

 
—

 
160,961

Investments in subsidiaries
1,448,690

 
—

 
(1,448,690
)
 
—

Deferred tax assets, net
10,892

 
65,521

 
—

 
76,413

Other assets
3,465

 
44,605

 
—

 
48,070

Total assets
$
3,502,633

 
$
2,545,988

 
$
(2,243,240
)
 
$
3,805,381

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Accounts payable
$
9,364

 
$
63,506

 
$
—

 
$
72,870

Intercompany payables
—

 
794,550

 
(794,550
)
 
—

Accrued expenses and other liabilities
92,245

 
238,637

 
—

 
330,882

Senior notes
1,471,302

 
—

 
—

 
1,471,302

Total liabilities
1,572,911

 
1,096,693

 
(794,550
)
 
1,875,054

 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
Total stockholders’ equity
1,929,722

 
1,448,690

 
(1,448,690
)
 
1,929,722

Noncontrolling interests
—

 
605

 
—

 
605

Total equity
1,929,722

 
1,449,295

 
(1,448,690
)
 
1,930,327

Total liabilities and equity
$
3,502,633

 
$
2,545,988

 
$
(2,243,240
)
 
$
3,805,381







- 29 -


Condensed Consolidating Statement of Operations (in thousands):
 
 
Three Months Ended September 30, 2018
 
Issuer
 
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
TRI Pointe
Group, Inc.
Homebuilding:
 
 
 
 
 
 
 
Home sales revenue
$
264,499

 
$
507,269

 
$
—

 
$
771,768

Land and lot sales revenue
—

 
2,225

 
—

 
2,225

Other operations revenue
—

 
598

 
—

 
598

Total revenues
264,499

 
510,092

 
—

 
774,591

Cost of home sales
214,759

 
392,294

 
—

 
607,053

Cost of land and lot sales
—

 
2,234

 
—

 
2,234

Other operations expense
—

 
590

 
—

 
590

Sales and marketing
11,434

 
33,420

 
—

 
44,854

General and administrative
19,427

 
18,682

 
—

 
38,109

Homebuilding income from operations
18,879

 
62,872

 
—

 
81,751

Equity in income of unconsolidated entities
—

 
15

 
—

 
15

Other (expense) income, net
(572
)
 
95

 
—

 
(477
)
Homebuilding income before income taxes
18,307

 
62,982

 
—

 
81,289

Financial Services:
 
 
 
 
 
 
 
Revenues
—

 
480

 
—

 
480

Expenses
—

 
125

 
—

 
125

Equity in income of unconsolidated entities
—

 
1,986

 
—

 
1,986

Financial services income before income taxes
—

 
2,341

 
—

 
2,341

Income before income taxes
18,307

 
65,323

 
—

 
83,630

Equity of net income of subsidiaries
45,662

 
—

 
(45,662
)
 
—

Provision for income taxes
—

 
(19,661
)
 
—

 
(19,661
)
Net income
63,969

 
45,662

 
(45,662
)
 
63,969

Net income attributable to noncontrolling interests
—

 
—

 
—

 
—

Net income available to common stockholders
$
63,969

 
$
45,662

 
$
(45,662
)
 
$
63,969





- 30 -


 
Condensed Consolidating Statement of Operations (in thousands):
 
 
Three Months Ended September 30, 2017
 
Issuer
 
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
TRI Pointe
Group, Inc.
Homebuilding:
 
 
 
 
 
 
 
Home sales revenue
$
239,110

 
$
409,528

 
$
—

 
$
648,638

Land and lot sales revenue
—

 
68,218

 
—

 
68,218

Other operations revenue
—

 
584

 
—

 
584

Total revenues
239,110

 
478,330

 
—

 
717,440

Cost of home sales
200,384

 
321,534

 
—

 
521,918

Cost of land and lot sales
—

 
12,001

 
—

 
12,001

Other operations expense
—

 
575

 
—

 
575

Sales and marketing
8,816

 
24,363

 
—

 
33,179

General and administrative
15,560

 
17,396

 
—

 
32,956

Homebuilding income from operations
14,350

 
102,461

 
—

 
116,811

Equity in income of unconsolidated entities
—

 
—

 
—

 
—

Other income, net
15

 
11

 
—

 
26

Homebuilding income before income taxes
14,365

 
102,472

 
—

 
116,837

Financial Services:
 
 
 
 
 
 
 
Revenues
—

 
295

 
—

 
295

Expenses
—

 
82

 
—

 
82

Equity in income of unconsolidated entities
—

 
1,351

 
—

 
1,351

Financial services income before income taxes
—

 
1,564

 
—

 
1,564

Income before income taxes
14,365

 
104,036

 
—

 
118,401

Equity of net income of subsidiaries
59,725

 
—

 
(59,725
)
 
—

Provision for income taxes
(1,826
)
 
(44,286
)
 
—

 
(46,112
)
Net income
72,264

 
59,750

 
(59,725
)
 
72,289

Net income attributable to noncontrolling interests
—

 
(25
)
 
—

 
(25
)
Net income available to common stockholders
$
72,264

 
$
59,725

 
$
(59,725
)
 
$
72,264











- 31 -


Condensed Consolidating Statement of Operations (in thousands):
 
 
Nine Months Ended September 30, 2018
 
Issuer
 
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
TRI Pointe
Group, Inc.
Homebuilding:
 
 
 
 
 
 
 
Home sales revenue
$
710,561

 
$
1,412,574

 
$
—

 
$
2,123,135

Land and lot sales revenue
—

 
3,966

 
—

 
3,966

Other operations revenue
—

 
1,795

 
—

 
1,795

Total revenues
710,561

 
1,418,335

 
—

 
2,128,896

Cost of home sales
586,852

 
1,074,799

 
—

 
1,661,651

Cost of land and lot sales
—

 
4,163

 
—

 
4,163

Other operations expense
—

 
1,781

 
—

 
1,781

Sales and marketing
33,943

 
94,938

 
—

 
128,881

General and administrative
55,527

 
55,879

 
—

 
111,406

Homebuilding income from operations
34,239

 
186,775

 
—

 
221,014

Equity in loss of unconsolidated entities
—

 
(384
)
 
—

 
(384
)
Other (loss) income, net
(537
)
 
158

 
—

 
(379
)
Homebuilding income before income taxes
33,702

 
186,549

 
—

 
220,251

Financial Services:
 
 
 
 
 
 
 
Revenues
—

 
1,154

 
—

 
1,154

Expenses
—

 
391

 
—

 
391

Equity in income of unconsolidated entities
—

 
4,972

 
—

 
4,972

Financial services income before income taxes
—

 
5,735

 
—

 
5,735

Income before income taxes
33,702

 
192,284

 
—

 
225,986

Equity of net income of subsidiaries
136,827

 
—

 
(136,827
)
 
—

Provision for income taxes
—

 
(55,457
)
 
—

 
(55,457
)
Net income
170,529

 
136,827

 
(136,827
)
 
170,529

Net income attributable to noncontrolling interests
—

 
—

 
—

 
—

Net income available to common stockholders
$
170,529

 
$
136,827

 
$
(136,827
)
 
$
170,529


- 32 -



Condensed Consolidating Statement of Operations (in thousands):
 
 
Nine Months Ended September 30, 2017
 
Issuer
 
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
TRI Pointe
Group, Inc.
Homebuilding:
 
 
 
 
 
 
 
Home sales revenue
$
524,159

 
$
1,085,299

 
$
—

 
$
1,609,458

Land and lot sales revenue
—

 
69,661

 
—

 
69,661

Other operations revenue
—

 
1,752

 
—

 
1,752

Total revenues
524,159

 
1,156,712

 
—

 
1,680,871

Cost of home sales
445,501

 
849,062

 
—

 
1,294,563

Cost of land and lot sales
—

 
13,299

 
—

 
13,299

Other operations expense
—

 
1,726

 
—

 
1,726

Sales and marketing
22,265

 
69,944

 
—

 
92,209

General and administrative
49,113

 
52,180

 
—

 
101,293

Homebuilding income from operations
7,280

 
170,501

 
—

 
177,781

Equity in income of unconsolidated entities
—

 
1,646

 
—

 
1,646

Other income, net
33

 
114

 
—

 
147

Homebuilding income before income taxes
7,313

 
172,261

 
—

 
179,574

Financial Services:
 
 
 
 
 
 
 
Revenues
—

 
881

 
—

 
881

Expenses
—

 
233

 
—

 
233

Equity in income of unconsolidated entities
—

 
2,911

 
—

 
2,911

Financial services income before income taxes
—

 
3,559

 
—

 
3,559

Income before income taxes
7,313

 
175,820

 
—

 
183,133

Equity of net income of subsidiaries
103,177

 
—

 
(103,177
)
 
—

Benefit (provision) for income taxes
2,681

 
(72,505
)
 
—

 
(69,824
)
Net income
113,171

 
103,315

 
(103,177
)
 
113,309

Net income attributable to noncontrolling interests
—

 
(138
)
 
—

 
(138
)
Net income available to common stockholders
$
113,171

 
$
103,177

 
$
(103,177
)
 
$
113,171


- 33 -



Condensed Consolidating Statement of Cash Flows (in thousands):
 
 
Nine Months Ended September 30, 2018
 
Issuer
 
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
TRI Pointe
Group, Inc.
Cash flows from operating activities:
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
60,315

 
$
(132,405
)
 
$
—

 
$
(72,090
)
Cash flows from investing activities:
 
 
 
 
 
 
 
Purchases of property and equipment
(6,603
)
 
(17,944
)
 
—

 
(24,547
)
Proceeds from sale of property and equipment
—

 
8

 
—

 
8

Investments in unconsolidated entities
—

 
(1,812
)
 
—

 
(1,812
)
Intercompany
(108,780
)
 
—

 
108,780

 
—

Net cash (used in) provided by investing activities
(115,383
)
 
(19,748
)
 
108,780

 
(26,351
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Borrowings from debt
100,000

 
—

 
—

 
100,000

Repayment of debt
(57,931
)
 
—

 
—

 
(57,931
)
Distributions to noncontrolling interests
—

 
(1
)
 
—

 
(1
)
Proceeds from issuance of common stock under
   share-based awards
1,943

 
—

 
—

 
1,943

Minimum tax withholding paid on behalf of employees for
   restricted stock units
(6,049
)
 
—

 
—

 
(6,049
)
Share repurchases
(139,349
)
 
—

 
—

 
(139,349
)
Intercompany
—

 
108,780

 
(108,780
)
 
—

Net cash (used in) provided by financing activities
(101,386
)
 
108,779

 
(108,780
)
 
(101,387
)
Net (decrease) increase in cash and cash equivalents
(156,454
)
 
(43,374
)
 
—

 
(199,828
)
Cash and cash equivalents - beginning of period
176,684

 
106,230

 
—

 
282,914

Cash and cash equivalents - end of period
$
20,230

 
$
62,856

 
$
—

 
$
83,086





- 34 -


Condensed Consolidating Statement of Cash Flows (in thousands):
 
 
Nine Months Ended September 30, 2017
 
Issuer
 
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
TRI Pointe
Group, Inc.
Cash flows from operating activities:
 
 
 
 
 
 
 
Net cash used in operating activities
$
(60,816
)
 
$
(149,840
)
 
$
—

 
$
(210,656
)
Cash flows from investing activities:
 
 
 
 
 
 
 
Purchases of property and equipment
(1,473
)
 
(739
)
 
—

 
(2,212
)
Proceeds from sale of property and equipment
—

 
6

 
—

 
6

Investments in unconsolidated entities
—

 
(934
)
 
—

 
(934
)
Intercompany
(161,755
)
 
—

 
161,755

 
—

Net cash used in investing activities
(163,228
)
 
(1,667
)
 
161,755

 
(3,140
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Borrowings from notes payable
500,000

 
—

 
—

 
500,000

Repayment of notes payable
(213,726
)
 
—

 
—

 
(213,726
)
Debt issuance costs
(5,932
)
 
—

 
—

 
(5,932
)
Distributions to noncontrolling interests
—

 
(987
)
 
—

 
(987
)
Proceeds from issuance of common stock under
   share-based awards
3,293

 
—

 
—

 
3,293

Minimum tax withholding paid on behalf of employees for restricted stock units
(2,896
)
 
—

 
—

 
(2,896
)
Share repurchases
(112,217
)
 
—

 
—

 
(112,217
)
Intercompany
—

 
161,755

 
(161,755
)
 
—

Net cash provided by financing activities
168,522

 
160,768

 
(161,755
)
 
167,535

Net (decrease) increase in cash and cash equivalents
(55,522
)
 
9,261

 
—

 
(46,261
)
Cash and cash equivalents - beginning of period
141,568

 
67,089

 
—

 
208,657

Cash and cash equivalents - end of period
$
86,046

 
$
76,350

 
$
—

 
$
162,396






- 35 -


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain statements that are “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are based on our current intentions, beliefs, expectations and predictions for the future, and you should not place undue reliance on these statements. These statements use forward-looking terminology, are based on various assumptions made by us, and may not be accurate because of risks and uncertainties surrounding the assumptions that are made.
Factors listed in this section–as well as other factors not included–may cause actual results to differ significantly from the forward-looking statements included in this Quarterly Report on Form 10-Q. There is no guarantee that any of the events anticipated by the forward-looking statements in this Quarterly Report on Form 10-Q will occur, or if any of the events occurs, there is no guarantee what effect it will have on our operations, financial condition, or share price.
We undertake no, and hereby disclaim any, obligation to update or revise any forward-looking statements, unless required by law. However, we reserve the right to make such updates or revisions from time to time by press release, periodic report, or other method of public disclosure without the need for specific reference to this Quarterly Report on Form 10-Q. No such update or revision shall be deemed to indicate that other statements not addressed by such update or revision remain correct or create an obligation to provide any other updates or revisions.
Forward-Looking Statements
Forward-looking statements that are included in this Quarterly Report on Form 10-Q are generally accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “future,” “goal,” “intend,” “likely,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would,” or other words that convey the uncertainty of future events or outcomes. These forward-looking statements may include, but are not limited to, statements regarding our strategy, projections and estimates concerning the timing and success of specific projects and our future production, land and lot sales, the outcome of legal proceedings, the anticipated impact of natural disasters on our operations, operational and financial results, including our estimates for growth, financial condition, sales prices, prospects and capital spending.
Risks, Uncertainties and Assumptions
The major risks and uncertainties–and assumptions that are made–that affect our business and may cause actual results to differ from these forward-looking statements include, but are not limited to:
•
the effect of general economic conditions, including employment rates, housing starts, interest rate levels, availability of financing for home mortgages and strength of the U.S. dollar;
•
market demand for our products, which is related to the strength of the various U.S. business segments and U.S. and international economic conditions;
•
levels of competition;
•
the successful execution of our internal performance plans, including restructuring and cost reduction initiatives;
•
global economic conditions;
•
raw material and labor prices and availability;
•
oil and other energy prices;
•
the effect of weather, including the re-occurrence of drought conditions in California;  
•
the risk of loss from earthquakes, volcanoes, fires, floods, droughts, windstorms, hurricanes, pest infestations and other natural disasters, and the risk of delays, reduced consumer demand, and shortages and price increases in labor or materials associated with such natural disasters;
•
transportation costs;
•
federal and state tax policies;
•
the effect of land use, environment and other governmental laws and regulations;
•
legal proceedings or disputes and the adequacy of reserves;
•
risks relating to any unforeseen changes to or effects on liabilities, future capital expenditures, revenues, expenses, earnings, synergies, indebtedness, financial condition, losses and future prospects;
•
changes in accounting principles;

- 36 -


•
risks related to unauthorized access to our computer systems, theft of our homebuyers’ confidential information or other forms of cyber-attack; and
•
other factors described in “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2017 and in other filings we make with the Securities and Exchange Commission (“SEC”).
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related condensed notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our securities. We urge investors to review and consider carefully the various disclosures made by us in this report and in our other reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2017 and subsequent reports on Form 8-K, which discuss our business in greater detail. The section entitled “Risk Factors” set forth in Item 1A of our Annual Report on Form 10-K, and similar disclosures in our other SEC filings, discuss some of the important risk factors that may affect our business, results of operations and financial condition. Investors should carefully consider those risks, in addition to the information in this report and in our other filings with the SEC, before deciding to invest in, or maintain an investment in, our common stock.
Overview and Outlook
For the three months ended September 30, 2018, deliveries increased 8% from the prior-year period and average sales price increased 10%, fueling a 19% increase in home sales revenue. The increase in new home deliveries was accompanied by a 180 basis point increase in homebuilding gross margins. New home orders were down 18% compared to the prior-year period, and backlog units at quarter end were down 7% compared to the end of the prior-year period. An increase in the average sales price of backlog to $681,000 was able to offset some of the backlog unit decline, resulting in a 3% decrease in backlog dollar value.
Based on our new home order trends for the third quarter 2018, we are seeing a softening of consumer motivation and demand in many of the markets in which we operate. Even though the overall housing market fundamentals remain strong, we believe home buyer demand has slowed in response to higher borrowing costs and the significant home price appreciation our industry has experienced over the last few years. We believe that this is a normal consumer reaction, and we are continuing to closely monitor this dynamic in all of our markets and focusing on pricing our products to market demand profiles.
We remain optimistic about the outlook for our industry and our Company. With respect to the industry, we continue to be optimistic due to the strength of the economy, overall job growth and healthy consumer confidence, which, along with pent-up demand from young adults, we believe will lead to growing household formations. In addition, the overall supply of new and existing homes on the market remains at low levels, and finished lot availability in the markets in which we build remains constrained.






- 37 -


Consolidated Financial Data (in thousands, except per share amounts):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Homebuilding:
 

 
 

 
 
 
 
Home sales revenue
$
771,768

 
$
648,638

 
$
2,123,135

 
$
1,609,458

Land and lot sales revenue
2,225

 
68,218

 
3,966

 
69,661

Other operations revenue
598

 
584

 
1,795

 
1,752

Total revenues
774,591

 
717,440

 
2,128,896

 
1,680,871

Cost of home sales
607,053

 
521,918

 
1,661,651

 
1,294,563

Cost of land and lot sales
2,234

 
12,001

 
4,163

 
13,299

Other operations expense
590

 
575

 
1,781

 
1,726

Sales and marketing
44,854

 
33,179

 
128,881

 
92,209

General and administrative
38,109

 
32,956

 
111,406

 
101,293

Homebuilding income from operations
81,751

 
116,811

 
221,014

 
177,781

Equity in income (loss) of unconsolidated entities
15

 
—

 
(384
)
 
1,646

Other (expense) income, net
(477
)
 
26

 
(379
)
 
147

Homebuilding income before income taxes
81,289

 
116,837

 
220,251

 
179,574

Financial Services:
 
 
 
 
 
 
 
Revenues
480

 
295

 
1,154

 
881

Expenses
125

 
82

 
391

 
233

Equity in income of unconsolidated entities
1,986

 
1,351

 
4,972

 
2,911

Financial services income before income taxes
2,341

 
1,564

 
5,735

 
3,559

Income before income taxes
83,630

 
118,401

 
225,986

 
183,133

Provision for income taxes
(19,661
)
 
(46,112
)
 
(55,457
)
 
(69,824
)
Net income
63,969

 
72,289

 
170,529

 
113,309

Net income attributable to noncontrolling interests
—

 
(25
)
 
—

 
(138
)
Net income available to common stockholders
$
63,969

 
$
72,264

 
$
170,529

 
$
113,171

Earnings per share
 
 
 

 
 
 
 

Basic
$
0.43

 
$
0.48

 
$
1.13

 
$
0.73

Diluted
$
0.43

 
$
0.48

 
$
1.13

 
$
0.73

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Net New Home Orders, Average Selling Communities and Monthly Absorption Rates by Segment
 
 
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
Percentage Change
 
Net New
Home
Orders
 
Average
Selling
Communities
 
Monthly
Absorption
Rates
 
Net New
Home
Orders
 
Average
Selling
Communities
 
Monthly
Absorption
Rates
 
Net New
Home
Orders
 
Average
Selling
Communities
 
Monthly
Absorption
Rates
Maracay
97

 
11.0

 
2.9

 
158

 
13.5

 
3.9

 
(39
)%
 
(19
)%
 
(25
)%
Pardee Homes
357

 
36.8

 
3.2

 
421

 
30.8

 
4.6

 
(15
)%
 
19
 %
 
(29
)%
Quadrant Homes
64

 
7.0

 
3.0

 
84

 
8.3

 
3.4

 
(24
)%
 
(16
)%
 
(10
)%
Trendmaker Homes
139

 
27.5

 
1.7

 
113

 
29.3

 
1.3

 
23
 %
 
(6
)%
 
31
 %
TRI Pointe Homes
266

 
30.3

 
2.9

 
378

 
34.7

 
3.6

 
(30
)%
 
(13
)%
 
(19
)%
Winchester Homes
112

 
14.7

 
2.5

 
114

 
13.2

 
2.9

 
(2
)%
 
11
 %
 
(12
)%
Total
1,035

 
127.3

 
2.7

 
1,268

 
129.8

 
3.3

 
(18
)%
 
(2
)%
 
(17
)%
 

- 38 -


Net new home orders for the three months ended September 30, 2018 decreased by 233 orders, or 18%, to 1,035, compared to 1,268 during the prior-year period.  The decrease in net new home orders was largely due to a 17% decrease in monthly absorption rate. The overall decrease in our monthly absorption rate represents a return to seasonal monthly absorption rates that we generally expect for the third quarter, after a third quarter of 2017 that carried forward continued strong demand from the spring selling season. In addition, as mentioned above, we have experienced reduced overall demand due to rising mortgage interest rates and affordability concerns in certain markets, most notably in Northern California communities at our TRI Pointe Homes brand and in the Seattle area communities at our Quadrant Homes brand.
Maracay reported a 39% decrease in net new home orders driven by a 25% decrease in monthly absorption rate and a 19% decrease in average selling communities. The monthly absorption rate of 2.9 for the quarter is consistent with seasonal expectations, as discussed above. The decrease in average selling communities was due to the timing of community openings and closings. Pardee Homes reported a 15% decrease in net new home orders driven by a 29% decrease in monthly absorption rate, offset by a 19% increase in average selling communities. The monthly absorption rate remained strong at 3.2, but decreased from 4.6 in the prior year for the reasons discussed above. The increase in average selling communities was a result of increased community count in the Los Angeles, Inland Empire and Las Vegas markets, offset by a decrease in San Diego. Net new home orders decreased 24% at Quadrant Homes due primarily to a 16% decrease in average selling communities and a 10% decrease in monthly absorption rate compared to the prior-year period. The decrease in average selling communities was due to the timing of the opening and closing of communities. The monthly absorption rate of 3.0 for the quarter was consistent with seasonal expectations but represented a decrease compared to strong absorptions in the prior-year period, as discussed above. In addition, we experienced some softening market conditions due to increased interest rates and affordability concerns at our higher price point communities. As a result, the Company increased price incentives and increased marketing efforts during the third quarter to help offset the demand headwinds. Trendmaker Homes’ net new home orders increased 23% due to a 31% increase in monthly absorption rate offset by a 6% decrease in average selling communities. The increase in monthly absorption rate was due to continued improved market conditions in Houston during the quarter. In addition, net new home orders for the prior-year period were negatively impacted by Hurricane Harvey. TRI Pointe Homes’ net new home orders decreased 30% due to a 19% decrease in our monthly absorption rate and a 13% decrease in average selling communities. The decrease in our monthly absorption rate was due both to the difficult comparison to the strong demand in the prior-year period discussed above and lower overall demand due to rising interest rates and affordability concerns in certain higher priced Northern California communities. Similar to Quadrant Homes above, TRI Pointe Homes increased incentives and marketing efforts to help offset these demand headwinds. Winchester Homes reported a 2% decrease in net new home orders as a result of a 12% decrease in our monthly absorption rate, offset by an 11% increase in average selling communities. The decrease in monthly absorption rate was due to changes in product mix, with fewer high absorbing attached communities compared to the prior-year period.
Backlog Units, Dollar Value and Average Sales Price by Segment (dollars in thousands)
 
As of September 30, 2018
 
As of September 30, 2017
 
Percentage Change
 
Backlog
Units
 
Backlog
Dollar
Value
 
Average
Sales
Price
 
Backlog
Units
 
Backlog
Dollar
Value
 
Average
Sales
Price
 
Backlog
Units
 
Backlog
Dollar
Value
 
Average
Sales
Price
Maracay
216

 
$
122,617

 
$
568

 
305

 
$
154,324

 
$
506

 
(29
)%
 
(21
)%
 
12
 %
Pardee Homes
698

 
451,398

 
647

 
646

 
436,376

 
676

 
8
 %
 
3
 %
 
(4
)%
Quadrant Homes
129

 
127,136

 
986

 
206

 
160,202

 
778

 
(37
)%
 
(21
)%
 
27
 %
Trendmaker Homes
239

 
143,000

 
598

 
213

 
107,968

 
507

 
12
 %
 
32
 %
 
18
 %
TRI Pointe Homes
627

 
460,700

 
735

 
659

 
481,537

 
731

 
(5
)%
 
(4
)%
 
1
 %
Winchester Homes
192

 
126,374

 
658

 
236

 
141,858

 
601

 
(19
)%
 
(11
)%
 
9
 %
Total
2,101

 
$
1,431,225

 
$
681

 
2,265

 
$
1,482,265

 
$
654

 
(7
)%
 
(3
)%
 
4
 %
 
Backlog units reflect the number of homes, net of actual cancellations experienced during the period, for which we have entered into a sales contract with a homebuyer but for which we have not yet delivered the home. Homes in backlog are generally delivered within three to nine months, although we may experience cancellations of sales contracts prior to delivery. Our cancellation rate of homebuyers who contracted to buy a home but cancelled prior to delivery of the home (as a percentage of overall orders) increased to 19% compared to 15% during the prior-year period. The dollar value of backlog was $1.4 billion as of September 30, 2018, a decrease of $51.0 million, or 3%, compared to $1.5 billion as of September 30, 2017.  This decrease was due to a decrease in backlog units of 164, or 7%, to 2,101 as of September 30, 2018, compared to 2,265 as of September 30, 2017, offset by a 4% increase in the average sales price of homes in backlog to $681,000 as of September 30, 2018, compared to $654,000 as of September 30, 2017.

- 39 -


Maracay's backlog dollar value decreased 21% compared to the prior year due to a 29% decrease in backlog units, offset by a 12% increase in average sales price. The decrease in backlog units was due to the 39% decrease in net new home orders during the three months ended September 30, 2018 as a result of a decrease in average selling communities and our monthly absorption rate. Pardee Homes’ backlog dollar value increased 3% due to an increase in backlog units of 8% offset by a decrease in average sales price of 4%. The increase in backlog units was due to the carryover of backlog units from the second quarter of 2018 and the timing of construction and deliveries. Quadrant Homes’ backlog dollar value decreased 21% as a result of a 37% decrease in backlog units offset by a 27% increase in average sales price. The decrease in backlog units was a result of the 24% decrease in new home orders for the three months ended September 30, 2018 as well as starting the quarter with fewer units in backlog compared to the same period last year. The increase in average sales price was related to a higher mix of homes in backlog from the core Seattle markets of King and Snohomish counties which have higher price points. Trendmaker Homes’ backlog dollar value increased 32% primarily due to an 18% increase in average sales price and a 12% increase in backlog units. The increase in backlog units related to the 23% increase in net new home orders for the quarter and timing of deliveries. TRI Pointe Homes’ backlog dollar value decreased 4% due to a 5% decrease in backlog units offset by a 1% increase in average selling price. Winchester Homes’ backlog dollar value decreased 11% driven by the 19% decrease in backlog units offset by a 9% increase in average sales price. The decrease in backlog units is a result of the 2% decrease in net new home orders for the three months ended September 30, 2018 as well as starting the quarter with fewer units in backlog compared to the same period last year. The increase in average sales price compared to the prior year was due to mix of more detached product which generally has a higher average sales price.
New Homes Delivered, Homes Sales Revenue and Average Sales Price by Segment (dollars in thousands)
 
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
Percentage Change
 
New
Homes
Delivered
 
Home
Sales
Revenue
 
Average
Sales
Price
 
New
Homes
Delivered
 
Home
Sales
Revenue
 
Average
Sales
Price
 
New
Homes
Delivered
 
Home
Sales
Revenue
 
Average
Sales
Price
Maracay
137

 
$
66,730

 
$
487

 
164

 
$
78,166

 
$
477

 
(16
)%
 
(15
)%
 
2
%
Pardee Homes
354

 
224,452

 
634

 
328

 
164,548

 
502

 
8
 %
 
36
 %
 
26
%
Quadrant Homes
73

 
65,576

 
898

 
79

 
54,197

 
686

 
(8
)%
 
21
 %
 
31
%
Trendmaker Homes
150

 
77,348

 
516

 
104

 
52,453

 
504

 
44
 %
 
47
 %
 
2
%
TRI Pointe Homes
367

 
264,500

 
721

 
332

 
239,110

 
720

 
11
 %
 
11
 %
 
—
%
Winchester Homes
124

 
73,162

 
590

 
104

 
60,164

 
579

 
19
 %
 
22
 %
 
2
%
Total
1,205

 
$
771,768

 
$
640

 
1,111

 
$
648,638

 
$
584

 
8
 %
 
19
 %
 
10
%
 
Home sales revenue increased $123.1 million, or 19%, to $771.8 million for the three months ended September 30, 2018. The increase was comprised of (i) $68.2 million related to a $56,000, or 10%, increase in average sales price of homes delivered to $640,000 for the three months ended September 30, 2018, from $584,000 in the prior-year period, and (ii) $54.9 million related to an increase in new homes delivered to 1,205 for the three months ended September 30, 2018 from 1,111 in the prior-year period.
Maracay had a 15% decrease in home sales revenue due to a 16% decrease in new homes delivered. The decrease in new home deliveries was due to the decrease in new home orders and the timing of deliveries, impacted in part by a decrease in community count. Pardee Homes’ home sales revenue increased 36% due to a 26% increase in average sales price. The increase in average sales price was due to a product mix shift that included a greater proportion of deliveries from our higher priced long-dated California assets. Quadrant Homes increased home sales revenue by 21% due to a 31% increase in average sales price, offset by an 8% decrease in new homes delivered. The decrease in new homes delivered was due to starting the current-year period with a lower number of backlog units compared to the prior-year period. The increase in average sales price was the result of delivering more units in the core Seattle markets of King and Snohomish counties, which have higher price points and reflects price increases implemented in the early part of 2018. Trendmaker Homes’ home sales revenue increased 47% due to a 44% increase in new homes delivered. The increase in new homes delivered was largely due to the timing of deliveries, which was driven by a 23% increase in backlog units to start the quarter compared to the prior-year period. TRI Pointe Homes had an 11% increase in home sales revenue due to an 11% increase in new homes delivered. The increase in new homes delivered was driven by 19% higher backlog units at the start of the quarter compared to the prior-year period. Home sales revenue increased at Winchester Homes by 22% due to a 19% increase in new homes delivered due to the timing of deliveries.

- 40 -


Homebuilding Gross Margins (dollars in thousands)
 
Three Months Ended September 30,
 
2018
 
%
 
2017
 
%
Home sales revenue
$
771,768

 
100.0
%
 
$
648,638

 
100.0
%
Cost of home sales
607,053

 
78.7
%
 
521,918

 
80.5
%
Homebuilding gross margin
164,715

 
21.3
%
 
126,720

 
19.5
%
Add:  interest in cost of home sales
20,128

 
2.6
%
 
15,623

 
2.4
%
Add:  impairments and lot option abandonments
568

 
0.1
%
 
374

 
0.1
%
Adjusted homebuilding gross margin(1)
$
185,411

 
24.0
%
 
$
142,717

 
22.0
%
Homebuilding gross margin percentage
21.3
%
 
 
 
19.5
%
 
 
Adjusted homebuilding gross margin percentage(1)
24.0
%
 
 
 
22.0
%
 
 
__________
(1) 
Non-GAAP financial measure (as discussed below).
Our homebuilding gross margin percentage increased to 21.3% for the three months ended September 30, 2018 as compared to 19.5% for the prior-year period.  The increase in gross margin percentage was primarily due to the mix of deliveries, with a greater proportion of deliveries from our long-dated California communities, which produce gross margins above the Company average, having a greater impact on our overall gross margin percentage compared to the prior-year period. In addition, gross margin percentage increased due to the accounting changes resulting from the adoption of ASC 606 on January 1, 2018. For further details on ASC 606, see Note 1, Organization, Basis of Presentation and Summary of Significant Accounting Policies to the accompanying condensed notes to unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. Excluding interest and impairment and lot option abandonments in cost of home sales, adjusted homebuilding gross margin percentage was 24.0% for the three months ended September 30, 2018, compared to 22.0% for the prior-year period.
Adjusted homebuilding gross margin is a non-GAAP financial measure. We believe this information is meaningful as it isolates the impact that leverage and noncash charges have on homebuilding gross margin and permits investors to make better comparisons with our competitors, who adjust gross margins in a similar fashion. Because adjusted homebuilding gross margin is not calculated in accordance with GAAP, it may not be comparable to other similarly titled measures of other companies and should not be considered in isolation or as a substitute for, or superior to, financial measures prepared in accordance with GAAP.  See the table above reconciling this non-GAAP financial measure to homebuilding gross margin, the most directly comparable GAAP measure.
Sales and Marketing, General and Administrative Expense (dollars in thousands)
 
Three Months Ended September 30,
 
As a Percentage of
Home Sales Revenue
 
2018
 
2017
 
2018
 
2017
Sales and marketing
$
44,854

 
$
33,179

 
5.8
%
 
5.1
%
General and administrative (G&A)
38,109

 
32,956

 
4.9
%
 
5.1
%
Total sales and marketing and G&A
$
82,963

 
$
66,135

 
10.7
%
 
10.2
%
 
Total sales and marketing and G&A (“SG&A”) as a percentage of home sales revenue increased to 10.7% for the three months ended September 30, 2018, compared to 10.2% in the prior-year period. Total SG&A expense increased $16.8 million, to $83.0 million for the three months ended September 30, 2018 from $66.1 million in the prior-year period.  
Sales and marketing expense as a percentage of home sales revenue increased to 5.8% for the three months ended September 30, 2018, compared to 5.1% for the prior-year period. The increase was due primarily to advertising costs impacted by the timing of future community openings and the accounting changes resulting from the adoption of ASC 606 on January 1, 2018. For further details on ASC 606, see Note 1, Organization, Basis of Presentation and Summary of Significant Accounting Policies to the accompanying condensed notes to unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. Sales and marketing expense increased to $44.9 million for the three months ended September 30, 2018 compared to $33.2 million in the prior-year period due in part to the variable cost associated with higher home sales revenue, in addition to the accounting changes resulting from the adoption of ASC 606 on January 1, 2018.

- 41 -


General and administrative (“G&A”) expenses as a percentage of home sales revenue decreased to 4.9% of home sales revenue for the three months ended September 30, 2018 compared to 5.1% for the prior-year period as a result of higher operating leverage due to the 19% increase in home sales revenue.  G&A expenses increased to $38.1 million for the three months ended September 30, 2018 compared to $33.0 million for the prior-year period primarily as a result of additional headcount to support future growth in our existing markets.
Interest
Interest, which was incurred principally to finance land acquisitions, land development and home construction, totaled $23.9 million and $22.9 million for the three months ended September 30, 2018 and 2017, respectively.  All interest incurred in both periods was capitalized.  
Income Tax
For the three months ended September 30, 2018, we recorded a tax provision of $19.7 million based on an effective tax rate of 23.5%.  For the three months ended September 30, 2017, we recorded a tax provision of $46.1 million based on an effective tax rate of 38.9%. The decrease in the current year income tax rate is due to enactment of the Tax Cuts and Jobs Act which reduced the federal corporate tax rate to 21% from 35%, effective January 1, 2018. The decrease in provision for income taxes is due to a $34.8 million decrease in income before income taxes to $83.6 million for the three months ended September 30, 2018, compared to $118.4 million for the prior-year period. During the quarter ended September 30, 2017, our Pardee Homes reporting segment sold a land parcel, consisting of 69 homebuilding lots, located in the Pacific Highlands Ranch community in San Diego, California. The land sold in this sale represented $66.8 million of land and lot sales revenue contributing a significant profit to the consolidated statements of operations for the three months ended September 30, 2017, with no comparable sale in the current year period.
Financial Services Segment
Income from our financial services operations increased to $2.3 million for the three months ended September 30, 2018 compared to $1.6 million for the prior-year period.  The increase in financial services income for the three months ended September 30, 2018 compared to the prior-year period relates to the growth of our mortgage financing and title services operations.  Both our mortgage financing and title service operations were started in late 2014 and have experienced steady year-over-year growth from inception. In early 2018, we further expanded our suite of financial services operations to include homeowners' insurance services. We expect the launch of these insurance agency operations will provide further growth to this segment of our business.
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Net New Home Orders, Average Selling Communities and Monthly Absorption Rates by Segment
 
 
Nine Months Ended September 30, 2018
 
Nine Months Ended September 30, 2017
 
Percentage Change
 
Net New
Home
Orders
 
Average
Selling
Communities
 
Monthly
Absorption
Rates
 
Net New
Home
Orders
 
Average
Selling
Communities
 
Monthly
Absorption
Rates
 
Net New
Home
Orders
 
Average
Selling
Communities
 
Monthly
Absorption
Rates
Maracay
382

 
12.6

 
3.4

 
504

 
15.3

 
3.7

 
(24
)%
 
(18
)%
 
(8
)%
Pardee Homes
1,294

 
34.3

 
4.2

 
1,282

 
29.3

 
4.9

 
1
 %
 
17
 %
 
(14
)%
Quadrant Homes
226

 
6.8

 
3.7

 
311

 
7.6

 
4.5

 
(27
)%
 
(11
)%
 
(18
)%
Trendmaker Homes
455

 
28.7

 
1.8

 
393

 
30.9

 
1.4

 
16
 %
 
(7
)%
 
29
 %
TRI Pointe Homes
1,133

 
32.5

 
3.9

 
1,144

 
31.9

 
4.0

 
(1
)%
 
2
 %
 
(3
)%
Winchester Homes
384

 
14.1

 
3.0

 
378

 
12.4

 
3.4

 
2
 %
 
14
 %
 
(12
)%
Total
3,874

 
129.0

 
3.3

 
4,012

 
127.4

 
3.5

 
(3
)%
 
1
 %
 
(6
)%
 
Net new home orders for the nine months ended September 30, 2018 decreased by 138 orders, or 3%, to 3,874, compared to 4,012 during the prior-year period.  The decrease in net new home orders was due to a 6% decrease in our average monthly absorption rate.

- 42 -


Maracay reported a 24% decrease in net new home orders driven by an 18% decrease in average selling communities and an 8% decrease in our monthly absorption rate. The decrease in average selling communities was due to the timing of the opening and closing of communities. For the period, Maracay experienced seasonally strong market conditions in Arizona, as demonstrated by a monthly absorption rate of 3.4 homes per community. Pardee Homes increased net new home orders by 1% due to a 17% increase in average community count offset by a 14% decrease in monthly absorption rate. The increase in average selling communities was a result of increased community growth in the Los Angeles, Inland Empire and Las Vegas markets. Overall demand for the period was strong at Pardee Homes with a monthly absorption rate of 4.2 homes per community. Net new home orders decreased 27% at Quadrant Homes due primarily to an 18% decrease in monthly absorption rate and an 11% decrease in average selling communities. The decrease in the monthly absorption rate at Quadrant Homes was due to a higher priced but slower absorbing product mix compared to the prior year, as evidenced by the 27% increase in the average sales price in backlog as of September 30, 2018 compared to September 30, 2017. In addition, we experienced softening market conditions due to increased interest rates and affordability concerns at our higher price point communities. Trendmaker Homes’ net new home orders increased 16% due to a 29% increase in our monthly absorption rate offset by a 7% decrease in average selling communities. The increase in the monthly absorption rate was due to improved market conditions in Houston during the nine months ended September 30, 2018 compared to the prior-year period. TRI Pointe Homes’ net new home orders decreased 1% due to a 3% decrease in monthly absorption rate offset by a 2% increase in average selling communities. Winchester Homes increased net new home orders 2% as a result of a 14% increase in average selling communities offset by a 12% decrease in our monthly absorption rate. The decrease in our monthly absorption rate was due to changes in product mix, with fewer attached communities with high absorption rates compared to the prior-year period.
New Homes Delivered, Homes Sales Revenue and Average Sales Price by Segment (dollars in thousands)
 
Nine Months Ended September 30, 2018
 
Nine Months Ended September 30, 2017
 
Percentage Change
 
New
Homes
Delivered
 
Home
Sales
Revenue
 
Average
Sales
Price
 
New
Homes
Delivered
 
Home
Sales
Revenue
 
Average
Sales
Price
 
New
Homes
Delivered
 
Home
Sales
Revenue
 
Average
Sales
Price
Maracay
383

 
$
182,134

 
$
476

 
447

 
$
204,981

 
$
459

 
(14
)%
 
(11
)%
 
4
%
Pardee Homes
1,005

 
648,208

 
645

 
896

 
428,624

 
478

 
12
 %
 
51
 %
 
35
%
Quadrant Homes
241

 
191,686

 
795

 
206

 
133,747

 
649

 
17
 %
 
43
 %
 
22
%
Trendmaker Homes
389

 
194,731

 
501

 
343

 
169,189

 
493

 
13
 %
 
15
 %
 
2
%
TRI Pointe Homes
983

 
710,561

 
723

 
783

 
524,159

 
669

 
26
 %
 
36
 %
 
8
%
Winchester Homes
343

 
195,815

 
571

 
265

 
148,758

 
561

 
29
 %
 
32
 %
 
2
%
Total
3,344

 
$
2,123,135

 
$
635

 
2,940

 
$
1,609,458

 
$
547

 
14
 %
 
32
 %
 
16
%
 
Home sales revenue increased $513.7 million, or 32%, to $2.1 billion for the nine months ended September 30, 2018. The increase was comprised of (i) $221.2 million related to an increase in new homes delivered to 3,344 for the nine months ended September 30, 2018 from 2,940 in the prior-year period, and (ii) $292.5 million related to an $88,000, or 16%, increase in average sales price of homes delivered to $635,000 for the nine months ended September 30, 2018, from $547,000 in the prior-year period.
Maracay had an 11% decrease in home sales revenue due to a 14% decrease in new homes delivered, offset by a 4% increase in average sales price. The decrease in new home deliveries was due to the decrease in new home orders and the timing of deliveries. Pardee Homes’ home sales revenue increased 51% due to a 35% increase in average sales price and a 12% increase in new homes delivered. The increase in average sales price was due to a product mix shift that included a greater proportion of deliveries from our higher priced long-dated California assets. Quadrant Homes increased home sales revenue by 43% due to a 17% increase in new homes delivered and a 22% increase in average sales price. The increase in average sales price was the result of delivering more units in the core Seattle markets of King and Snohomish counties, which have higher price points. Trendmaker Homes’ home sales revenue increased 15% due to a 13% increase in new homes delivered and a 2% increase in average sales price compared to the prior year. TRI Pointe Homes had a 36% increase in home sales revenue due to a 26% increase in new homes delivered and an 8% increase in average sales price. The increase in new homes delivered was driven by a greater number of backlog units to start the year compared to the prior-year period, and the increase in average sales price was related to product mix in the quarter. Home sales revenue increased at Winchester Homes by 32% largely due to an increase in homes delivered as a result of a greater number of backlog units to start the year compared to the prior-year period.

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Homebuilding Gross Margins (dollars in thousands)
 
Nine Months Ended September 30,
 
2018
 
%
 
2017
 
%
Home sales revenue
$
2,123,135

 
100.0
%
 
$
1,609,458

 
100.0
%
Cost of home sales
1,661,651

 
78.3
%
 
1,294,563

 
80.4
%
Homebuilding gross margin
461,484

 
21.7
%
 
314,895

 
19.6
%
Add:  interest in cost of home sales
53,926

 
2.5
%
 
38,448

 
2.4
%
Add:  impairments and lot option abandonments
1,425

 
0.1
%
 
1,169

 
0.1
%
Adjusted homebuilding gross margin(1)
$
516,835

 
24.3
%
 
$
354,512

 
22.0
%
Homebuilding gross margin percentage
21.7
%
 
 
 
19.6
%
 
 
Adjusted homebuilding gross margin percentage(1)
24.3
%
 
 
 
22.0
%
 
 
__________
(1) 
Non-GAAP financial measure (as discussed below).
Our homebuilding gross margin percentage increased to 21.7% for the nine months ended September 30, 2018 as compared to 19.6% for the prior-year period.  The increase in gross margin percentage was primarily due to the mix of deliveries, with a greater proportion of deliveries from our long-dated California communities, which produce gross margins above the Company average, having a greater impact on our overall gross margin percentage compared to the prior-year period. In addition, gross margin percentage increased due to the accounting changes resulting from the adoption of ASC 606 on January 1, 2018. Excluding interest and impairment and lot option abandonments in cost of home sales, adjusted homebuilding gross margin percentage was 24.3% for the nine months ended September 30, 2018, compared to 22.0% for the prior-year period.
Adjusted homebuilding gross margin is a non-GAAP financial measure. We believe this information is meaningful as it isolates the impact that leverage and noncash charges have on homebuilding gross margin and permits investors to make better comparisons with our competitors, who adjust gross margins in a similar fashion. Because adjusted homebuilding gross margin is not calculated in accordance with GAAP, it may not be comparable to other similarly titled measures of other companies and should not be considered in isolation or as a substitute for, or superior to, financial measures prepared in accordance with GAAP.  See the table above reconciling this non-GAAP financial measure to homebuilding gross margin, the most directly comparable GAAP measure.
Sales and Marketing, General and Administrative Expense (dollars in thousands)
 
Nine Months Ended September 30,
 
As a Percentage of
Home Sales Revenue
 
2018
 
2017
 
2018
 
2017
Sales and marketing
$
128,881

 
$
92,209

 
6.1
%
 
5.7
%
General and administrative (G&A)
111,406

 
101,293

 
5.2
%
 
6.3
%
Total sales and marketing and G&A
$
240,287

 
$
193,502

 
11.3
%
 
12.0
%
 
Total SG&A as a percentage of home sales revenue decreased to 11.3% for the nine months ended September 30, 2018, compared to 12.0% for the prior-year period. Total SG&A expense increased $46.8 million, to $240.3 million for the nine months ended September 30, 2018 from $193.5 million in the prior-year period.  
Sales and marketing expense as a percentage of home sales revenue increased to 6.1% for the nine months ended September 30, 2018, compared to 5.7% for the prior-year period. The increase was due primarily to advertising costs impacted by the timing of future community openings. This was mostly offset by the higher operating leverage on the fixed components of sales and marketing expenses as a result of the 32% increase in homes sales revenue. Sales and marketing expense increased to $128.9 million for the nine months ended September 30, 2018 compared to $92.2 million in the prior-year period due to higher advertising costs and the variable cost associated with higher home sales revenue, in addition to the accounting changes resulting from the adoption of ASC 606 on January 1, 2018. For further details on ASC 606, see Note 1, Organization, Basis of Presentation and Summary of Significant Accounting Policies to the accompanying condensed notes to unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.

- 44 -


G&A expenses as a percentage of home sales revenue decreased to 5.2% of home sales revenue for the nine months ended September 30, 2018 compared to 6.3% for the prior-year period as a result of higher operating leverage due to the 32% increase in home sales revenue.  G&A expenses increased to $111.4 million for the nine months ended September 30, 2018 compared to $101.3 million in the prior-year period primarily as a result of additional headcount to support future growth in our existing markets.
Interest
Interest, which was incurred principally to finance land acquisitions, land development and home construction, totaled $67.1 million and $61.7 million for the nine months ended September 30, 2018 and 2017, respectively.  All interest incurred in both periods was capitalized.  The increase in interest incurred during the nine months ended September 30, 2018 as compared to the prior-year period was primarily attributable to the issuance in June of 2017 of our $300 million aggregate principal amount of 5.250% Senior Notes due 2027 (the “2027 Notes”).
Income Tax
For the nine months ended September 30, 2018, we recorded a tax provision of $55.5 million based on an effective tax rate of 24.5%.  For the nine months ended September 30, 2017, we recorded a tax provision of $69.8 million based on an effective tax rate of 38.1%. The decrease in the current year income tax rate is due to enactment of the Tax Cuts and Jobs Act which reduced the federal corporate tax rate to 21% from 35%, effective January 1, 2018. The decrease in provision for income taxes is due to a $42.9 million increase in income before income taxes to $226.0 million for the nine months ended September 30, 2018, compared to $183.1 million for the prior-year period, offset by the benefit of a lower effective tax rate as discussed above.
Financial Services Segment
Income from our financial services operations increased to $5.7 million for the nine months ended September 30, 2018 compared to $3.6 million for the prior-year period.  The increase in financial services income for the nine months ended September 30, 2018 compared to the prior-year period relates to the growth of our mortgage financing and title services operations.  Both our mortgage financing and title service operations were started in late 2014 and have experienced steady year-over-year growth from inception. In early 2018, we further expanded our suite of financial services operations to include homeowners' insurance services. We expect the launch of these insurance agency operations will provide further growth to this segment of our business.

- 45 -


Lots Owned or Controlled by Segment
Excluded from owned and controlled lots are those related to Note 6, Investments in Unconsolidated Entities, to the accompanying condensed notes to unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. The table below summarizes our lots owned or controlled by segment as of the dates presented:
 
September 30,
 
Increase
(Decrease)
 
2018
 
2017
 
Amount
 
%
Lots Owned
 
 
 
 
 
 
 
Maracay
2,501

 
1,855

 
646

 
35
 %
Pardee Homes
14,427

 
15,348

 
(921
)
 
(6
)%
Quadrant Homes
1,002

 
1,169

 
(167
)
 
(14
)%
Trendmaker Homes
1,393

 
1,542

 
(149
)
 
(10
)%
TRI Pointe Homes
3,107

 
3,117

 
(10
)
 
—
 %
Winchester Homes
1,460

 
1,772

 
(312
)
 
(18
)%
Total
23,890

 
24,803

 
(913
)
 
(4
)%
Lots Controlled(1)
 
 
 
 
 
 
 
Maracay
710

 
751

 
(41
)
 
(5
)%
Pardee Homes
977

 
307

 
670

 
218
 %
Quadrant Homes
853

 
516

 
337

 
65
 %
Trendmaker Homes
428

 
314

 
114

 
36
 %
TRI Pointe Homes
1,107

 
667

 
440

 
66
 %
Winchester Homes
436

 
534

 
(98
)
 
(18
)%
Total
4,511

 
3,089

 
1,422

 
46
 %
Total Lots Owned or Controlled(1)
28,401

 
27,892

 
509

 
2
 %
__________
(1) 
As of September 30, 2018 and 2017, lots controlled represented lots that were under land or lot option contracts or purchase contracts.

Liquidity and Capital Resources
Overview
Our principal uses of capital for the nine months ended September 30, 2018 were operating expenses, land purchases, land development, home construction and repurchases of our senior notes and shares of our common stock. We used funds generated by our operations to meet our short-term working capital requirements. We remain focused on generating positive margins in our homebuilding operations and acquiring desirable land positions in order to maintain a strong balance sheet and keep us poised for growth. As of September 30, 2018, we had total liquidity of $569.9 million, including cash and cash equivalents of $83.1 million and $486.8 million of availability under the Credit Facility after considering the borrowing base provisions and outstanding letters of credit.
Our board of directors will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of new indebtedness, including the purchase price of assets to be acquired with debt financing, the estimated market value of our assets and the availability of particular assets, and our Company as a whole, to generate cash flow to cover the expected debt service.
Senior Notes
In June 2017, TRI Pointe Group issued the 2027 Notes at 100.00% of their aggregate principal amount. Net proceeds of this issuance was $296.3 million, after debt issuance costs and discounts. The 2027 Notes mature on June 1, 2027 and interest is paid semiannually in arrears on June 1 and December 1.
In May 2016, TRI Pointe Group issued $300 million aggregate principal amount of 4.875% Senior Notes due 2021 (the “2021 Notes”) at 99.44% of their aggregate principal amount. Net proceeds of this issuance was $293.9 million, after debt issuance costs and discounts. The 2021 Notes mature on July 1, 2021 and interest is paid semiannually in arrears on January 1 and July 1.

- 46 -


TRI Pointe Group and TRI Pointe Homes are co-issuers of $450 million aggregate principal amount of 4.375% Senior Notes due 2019 (“2019 Notes”) and $450 million aggregate principal amount of 5.875% Senior Notes due 2024 (“2024 Notes”). The 2019 Notes were issued at 98.89% of their aggregate principal amount and the 2024 Notes were issued at 98.15% of their aggregate principal amount. The net proceeds from the offering were $861.3 million, after debt issuance costs and discounts. The 2019 Notes and 2024 Notes mature on June 15, 2019 and June 15, 2024, respectively. Interest is payable semiannually in arrears on June 15 and December 15. During the three and nine months ended September 30, 2018, respectively, we repurchased and cancelled an aggregate principal amount of $36.2 million and $57.9 million of the 2019 Notes.
Our senior notes contain covenants that restrict our ability to, among other things, create liens or other encumbrances, enter into sale and leaseback transactions, or merge or sell all or substantially all of our assets. These limitations are subject to a number of qualifications and exceptions. As of September 30, 2018, we were in compliance with the covenants required by our senior notes.
Unsecured Revolving Credit Facility
On June 20, 2017, the Company modified its existing unsecured revolving credit facility (“Credit Facility”) to extend the maturity date by two years to May 18, 2021, while decreasing the total commitments under the Credit Facility to $600 million from $625 million.  In addition, the Credit Facility was modified to give the Company the option to make offers to the lenders to extend the maturity date of the Credit Facility in twelve-month increments, subject to the satisfaction of certain conditions. The Credit Facility contains a sublimit of $75 million for letters of credit. The Company may borrow under the Credit Facility in the ordinary course of business to fund its operations, including its land development and homebuilding activities. Borrowings under the Credit Facility will be governed by, among other things, a borrowing base. The Credit Facility contains customary affirmative and negative covenants, including financial covenants relating to consolidated tangible net worth, leverage, and liquidity or interest coverage. Interest rates on borrowings will be based on either a daily Eurocurrency base rate or a Eurocurrency rate, in either case, plus a spread ranging from 1.25% to 2.00% depending on the Company’s leverage ratio. As of September 30, 2018, we had $100 million outstanding under the Credit Facility and $486.8 million of availability after considering the borrowing base provisions and outstanding letters of credit.  At September 30, 2018, we had outstanding letters of credit of $13.2 million.  These letters of credit were issued to secure various financial obligations.  We believe it is not probable that any outstanding letters of credit will be drawn upon.
Under the Credit Facility, we are required to comply with certain financial covenants, including, but not limited to, those set forth in the table below (dollars in thousands):
 
 
Actual at
September 30,
 
Covenant
Requirement at
September 30,
Financial Covenants
2018
 
2018
Consolidated Tangible Net Worth
$
1,799,837

 
$
1,274,763

(Not less than $1.1 billion plus 50% of net income and
   50% of the net proceeds from equity offerings after
   March 31, 2017)
 
 
 

Leverage Test
44.9
%
 
≤55%

(Not to exceed 55%)
 
 
 

Interest Coverage Test
5.7

 
≥1.5

(Not less than 1.5:1.0)
 
 
 

 
As of September 30, 2018, we were in compliance with all of these financial covenants.
Stock Repurchase Program
On February 16, 2018, our board of directors discontinued and cancelled a share repurchase program approved in 2017 (the “2017 Repurchase Program”), and approved a new share repurchase program authorizing the repurchase of shares of common stock with an aggregate value of up to $100 million through March 31, 2019 (the “2018 Repurchase Program”). On August 21, 2018, our board of directors authorized the repurchase of up to an additional $100 million through March 31, 2019, increasing the aggregate value of shares of common stock authorized to be repurchased under the 2018 Repurchase Program to $200 million from $100 million. Purchases of common stock pursuant to the 2018 Repurchase Program may be made in open

- 47 -


market transactions effected through a broker-dealer at prevailing market prices, in block trades, or by other means in accordance with federal securities laws, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 under the Exchange Act. We are not obligated under the 2018 Repurchase Program to repurchase any specific number or dollar amount of shares of common stock, and we may modify, suspend or discontinue the 2018 Repurchase Program at any time. Our management will determine the timing and amount of repurchase in its discretion based on a variety of factors, such as the market price of our common stock, corporate requirements, general market economic conditions and legal requirements. During the three and nine months ended September 30, 2018, we repurchased and retired an aggregate of 9.9 million shares of our common stock under the 2018 Repurchase Program for $139.3 million.
Leverage Ratios
We believe that our leverage ratios provide useful information to the users of our financial statements regarding our financial position and cash and debt management. The ratio of debt-to-capital and the ratio of net debt-to-net capital are calculated as follows (dollars in thousands):  
 
September 30, 2018
 
December 31, 2017
Unsecured revolving credit facility
$
100,000

 
$
—

Senior Notes
1,419,198

 
1,471,302

Total debt
1,519,198

 
1,471,302

Stockholders’ equity
1,960,397

 
1,929,722

Total capital
$
3,479,595

 
$
3,401,024

Ratio of debt-to-capital(1)
43.7
%
 
43.3
%
 
 
 
 
Total debt
$
1,519,198

 
$
1,471,302

Less: Cash and cash equivalents
(83,086
)
 
(282,914
)
Net debt
1,436,112

 
1,188,388

Stockholders’ equity
1,960,397

 
1,929,722

Net capital
$
3,396,509

 
$
3,118,110

Ratio of net debt-to-net capital(2)
42.3
%
 
38.1
%
__________
(1) 
The ratio of debt-to-capital is computed as the quotient obtained by dividing total debt by the sum of total debt plus equity.
(2) 
The ratio of net debt-to-net capital is a non-GAAP financial measure and is computed as the quotient obtained by dividing net debt (which is total debt less cash and cash equivalents) by the sum of net debt plus equity. The most directly comparable GAAP financial measure is the ratio of debt-to-capital. We believe the ratio of net debt-to-net capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing. See the table above reconciling this non-GAAP financial measure to the ratio of debt-to-capital.  Because the ratio of net debt-to-net capital is not calculated in accordance with GAAP, it may not be comparable to other similarly titled measures of other companies and should not be considered in isolation or as a substitute for, or superior to, financial measures prepared in accordance with GAAP.
Cash Flows—Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
For the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, the comparison of cash flows is as follows:
•
Net cash used in operating activities decreased by $138.6 million to $72.1 million for the nine months ended September 30, 2018, from net cash used of $210.7 million for the nine months ended September 30, 2017. The change was comprised of offsetting activity, including (i) a decrease in cash outflows related to real estate inventories of $85.5 million due to timing of land acquisition and development, (ii) an increase in net income to $170.5 million in the nine months ended September 30, 2018 compared to $113.3 million in the prior-year period, (iii) an increase in cash collected from receivables of $40.6 million in the nine months ended September 30, 2018 compared to cash used of $3.3 million in the prior-year period, and (iv) other offsetting activity, including changes in other assets, accounts payable and accrued expenses.
•
Net cash used in investing activities was $26.4 million for the nine months ended September 30, 2018, compared to $3.1 million for the prior-year period.  The increase in cash used in investing activities was due mainly to

- 48 -


increased purchases of property and equipment and cash outflows associated with investments in unconsolidated entities. The large increase in purchases of property and equipment is due to the accounting changes resulting from the adoption of ASC 606 on January 1, 2018. Most model and sales office costs were previously recorded to inventory and were presented as an operating cash flow. Subsequent to the adoption of ASC 606 these purchases are recorded as fixed assets and included as investing cash flows. For further details on ASC 606, see Note 1, Organization, Basis of Presentation and Summary of Significant Accounting Policies to the accompanying condensed notes to unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.
•
Net cash used in financing activities was $101.4 million for the nine months ending September 30, 2018, compared to net cash provided by financing activities of $167.5 million for the same period in the prior year. The change was primarily driven by a decrease in net borrowings which were $42.1 million in the nine months ended September 30, 2018 compared to $286.3 million in the prior year. Additionally, cash used to repurchase shares of our common stock increased to $139.3 million during the nine months ended September 30, 2018 from $112.2 million in the prior year.
Off-Balance Sheet Arrangements and Contractual Obligations
In the ordinary course of business, we enter into purchase contracts in order to procure lots for the construction of our homes.  We are subject to customary obligations associated with entering into contracts for the purchase of land and improved lots.  These purchase contracts typically require a cash deposit and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements by the sellers, including obtaining applicable property and development entitlements.  We also utilize option contracts with land sellers and land banking arrangements as a method of acquiring land in staged takedowns, to help us manage the financial and market risk associated with land holdings, and to reduce the use of funds from our corporate financing sources.  These option contracts and land banking arrangements generally require a non-refundable deposit for the right to acquire land and lots over a specified period of time at pre-determined prices.  We generally have the right, at our discretion, to terminate our obligations under both purchase contracts and option contracts by forfeiting our cash deposit with no further financial responsibility to the land seller.  In some cases, however, we may be contractually obligated to complete development work even if we terminate the option to procure land or lots. As of September 30, 2018, we had $63.4 million of cash deposits, the majority of which are non-refundable, pertaining to land and lot option contracts and purchase contracts with an aggregate remaining purchase price of $732.8 million (net of deposits).
Our utilization of land and lot option contracts and land banking arrangements is dependent on, among other things, the availability of land sellers or land banking firms willing to enter into such arrangements, the availability of capital to finance the development of optioned land and lots, general housing market conditions, and local market dynamics.  Options may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain geographic regions.
As of September 30, 2018, we had total liquidity of $569.9 million, including cash of $83.1 million and $486.8 million of availability under the Credit Facility after considering the borrowing base provisions and outstanding letters of credit.
Inflation
Our operations can be adversely impacted by inflation, primarily from higher land, financing, labor, material and construction costs.  In addition, inflation can lead to higher mortgage rates, which can significantly affect the affordability of mortgage financing to homebuyers.  While we attempt to pass on cost increases to customers through increased prices, when weak housing market conditions exist, we are often unable to offset cost increases with higher selling prices. 
Seasonality
Historically, the homebuilding industry experiences seasonal fluctuations in quarterly operating results and capital requirements.  We typically experience the highest new home order activity during the first and second quarters of our fiscal year, although this activity is also highly dependent on the number of active selling communities, timing of new community openings and other market factors.  Since it typically takes three to nine months to construct a new home, the number of homes delivered and associated home sales revenue typically increases in the third and fourth quarters of our fiscal year as new home orders sold earlier in the year convert to home deliveries.  Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters of our fiscal year, and the majority of cash receipts from home deliveries occur during the second half of the year.  We expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding industry.

Description of Projects and Communities Under Development

- 49 -


The following table presents project information relating to each of our markets as of September 30, 2018 and includes information on current projects under development where we are building and selling homes.
Maracay
County, Project, City
Year of
First
Delivery(1)
 
Total
Number of
Lots(2)
 
Cumulative
Homes
Delivered
as of
September 30,
2018
 
Lots
Owned as of
September 30, 2018(3)
 
Backlog as of
September 30,
2018(4)(5)
 
Homes
Delivered
for the Nine
Months Ended
September 30,
2018
 
Sales Price
Range
(in thousands)(6)
Phoenix, Arizona
 
 
 
 
 
 
 
 
 
 
 
 
 
City of Buckeye:
 
 
 
 
 
 
 
 
 
 
 
 
 
Verrado Victory
2015
 
98

 
74

 
24

 
8

 
25

 
 $373 - $405
Arroyo Seco
2020
 
44

 
—

 
44

 
—

 
—

 
 $387 - $458
City of Chandler:
 
 
 
 
 
 
 
 
 
 
 
 
 
Hawthorn Manor
2017
 
84

 
55

 
29

 
14

 
24

 
 $490 - $564
Mission Estates
2019
 
26

 
—

 
26

 
—

 
—

 
 $530 - $590
Windermere Ranch
2019
 
91

 
—

 
91

 
—

 
—

 
 $448 - $476
City of Gilbert:
 
 
 
 
 
 
 
 
 
 
 
 
 
The Preserve at Adora Trails
2017
 
82

 
74

 
8

 
8

 
40

 
$420 - $463
Marathon Ranch
2018
 
63

 
—

 
63

 
24

 
—

 
$511 - $554
Lakes At Annecy
2019
 
216

 
—

 
216

 
—

 
—

 
$271 - $334
Annecy P3
2020
 
250

 
—

 
250

 
—

 
—

 
$226 - $301
Lakeview Trails
2019
 
92

 
—

 
92

 
—

 
—

 
$468 - $560
Copper Bend
2019
 
38

 
—

 
38

 
—

 
—

 
$451 - $484
Hamstra Assemblage
2020
 
332

 
—

 
332

 
—

 
—

 
$470 - $750
City of Goodyear:
 
 
 
 
 
 
 
 
 
 
 
 
 
Villages at Rio Paseo
2018
 
117

 
7

 
110

 
10

 
7

 
 $204 - $218
Cottages at Rio Paseo
2018
 
93

 
24

 
69

 
12

 
24

 
 $238 - $257
City of Mesa:
 
 
 
 
 
 
 
 
 
 
 
 
 
Kinetic Point at Eastmark
2013
 
80

 
79

 
1

 
1

 
2

 
 $297 - $376
Curie Court at Eastmark
2016
 
106

 
101

 
5

 
5

 
43

 
 $297 - $376
The Vista at Granite Crossing
2018
 
37

 
14

 
23

 
18

 
14

 
 $438 - $513
Electron at Eastmark
2019
 
53

 
—

 
53

 
—

 
—

 
 $360 - $437
Town of Peoria:
 
 
 
 
 
 
 
 
 
 
 
 
 
Legacy at The Meadows
2017
 
74

 
57

 
17

 
8

 
31

 
 $425 - $451
Estates at The Meadows
2017
 
272

 
72

 
200

 
48

 
29

 
 $486 - $560
Enclave at The Meadows
2018
 
126

 
19

 
107

 
10

 
19

 
 $375 - $470
Deseo
2019
 
94

 
—

 
94

 
—

 
—

 
 $494 - $547
City of Phoenix:
 
 
 
 
 
 
 
 
 
 
 
 
 
Navarro Groves
2018
 
54

 
6

 
48

 
28

 
6

 
 $431 - $476
Avance
2019
 
394

 
—

 
394

 
—

 
—

 
 $352 - $598
Town of Queen Creek:
 
 
 
 
 
 
 
 
 
 
 
 
 
Spur Cross
2020
 
118

 
—

 
118

 
—

 
—

 
 $454 - $544
Closed Communities
N/A
 
—

 
—

 
—

 
—

 
43

 
 
Phoenix, Arizona Total
 
 
3,034

 
582

 
2,452

 
194

 
307

 
 
Tucson, Arizona
 
 
 
 
 
 
 
 
 
 
 
 
 
Oro Valley:
 
 
 
 
 
 
 
 
 
 
 
 
 
Desert Crest - Center Pointe Vistoso
2016
 
103

 
75

 
28

 
8

 
26

 
$262 - $307
The Cove - Center Pointe Vistoso
2016
 
83

 
74

 
9

 
4

 
25

 
$345 - $405
Summit N & S - Center Pointe Vistoso
2016
 
88

 
79

 
9

 
8

 
14

 
$397 - $432
The Pinnacle - Center Pointe Vistoso
2016
 
69

 
66

 
3

 
2

 
6

 
$448 - $480
Closed Communities
N/A
 
—

 
—

 
—

 
—

 
5

 
 
Tucson, Arizona Total
 
 
343

 
294

 
49

 
22

 
76

 
 
Maracay Total
 
 
3,377

 
876

 
2,501

 
216

 
383

 
 


- 50 -


Pardee Homes
County, Project, City
Year of
First
Delivery(1)
 
Total
Number of
Lots(2)
 
Cumulative
Homes
Delivered
as of
September 30,
2018
 
Lots
Owned as of
September 30, 2018(3)
 
Backlog as of
September 30,
2018(4)(5)
 
Homes
Delivered
for the Nine
Months Ended
September 30,
2018
 
Sales Price
Range
(in thousands)(6)
California
 
 
 
 
 
 
 
 
 
 
 
 
 
San Diego County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Almeria
2017
 
80

 
48

 
32

 
32

 
33

 
$1,440 - $1,560
Olvera
2017
 
84

 
62

 
22

 
22

 
47

 
$1,315 - $1,470
Vista Santa Fe
2019
 
44

 
—

 
44

 
—

—

—

 
$1,780 - $1,895
Sendero
2019
 
112

 
—

 
112

 
—

—

—

 
$1,180 - $1,280
Terraza
2019
 
81

 
—

 
81

 
—

—

—

 
$1,300 - $1,390
Carmel
2019
 
105

 
—

 
105

 
—

—

—

 
$1,430 - $1,530
Vista Del Mar
2019
 
79

 
—

 
79

 
—

—

—

 
$1,560 - $1,710
Pacific Highlands Ranch Future
2020
 
115

 
—

 
115

 
—

—

—

 
TBD
Sandstone
2018
 
81

 
33

 
48

 
20

 
33

 
$640 - $710
Lake Ridge
2018
 
129

 
26

 
103

 
24

 
26

 
$710 - $860
Azul
2017
 
121

 
120

 
1

 
—

 
56

 
$360 - $475
Veraz
2018
 
111

 
—

 
111

 
2

 
—

 
$380 - $460
Moderna
2018
 
44

 
—

 
44

 
4

 
—

 
$355 - $440
Marea
2020
 
135

 
—

 
135

 
—

 
—

 
$370 - $470
Solmar
2019
 
182

 
—

 
182

 
—

 
—

 
$365 - $440
Meadowood
TBD
 
845

 
—

 
845

 
—

 
—

 
$290 - $590
South Otay Mesa
TBD
 
893

 
—

 
893

 
—

 
—

 
TBD
Los Angeles County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Verano
2017
 
95

 
30

 
65

 
11

 
21

 
$560 - $670
Arista
2017
 
143

 
59

 
84

 
10

 
29

 
$700 - $785
Cresta
2018
 
67

 
—

 
67

 
19

 
5

 
$790 - $890
Lyra
2019
 
84

 
—

 
84

 
—

 
—

 
 $648 - $715
Sola
2019
 
73

 
—

 
73

 
—

 
—

 
 $540 - $570
Skyline Ranch Future
TBD
 
1,063

 
—

 
1,063

 
—

 
—

 
 $550 - $810
Riverside County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Vantage
2016
 
101

 
75

 
26

 
23

 
23

 
$390 - $410
Aura
2017
 
100

 
73

 
27

 
20

 
25

 
$370 - $385
Starling
2017
 
68

 
35

 
33

 
5

 
20

 
$420 - $430
Canyon Hills Future 70 x 115
TBD
 
125

 
—

 
125

 
—

 
—

 
TBD
Westlake
2020
 
163

 
—

 
163

 
—

 
—

 
$318 - $325
Skycrest
2015
 
125

 
124

 
1

 
1

 
17

 
$378 - $400
Flagstone
2016
 
79

 
78

 
1

 
1

 
14

 
$430 - $450
Elara
2016
 
248

 
179

 
69

 
25

 
60

 
$300 - $330
Daybreak
2017
 
189

 
61

 
128

 
11

 
36

 
$350 - $375
Cascade
2017
 
151

 
64

 
87

 
48

 
37

 
$305 - $320
Abrio
2018
 
138

 
—

 
138

 
33

 
—

 
$400 - $425
Beacon
2018
 
106

 
—

 
106

 
34

 
—

 
$465 - $510
Alisio
2019
 
84

 
—

 
84

 
—

 
—

 
TBD
Vita
2019
 
152

 
—

 
152

 
3

 
—

 
$310 - $330
Avid
2019
 
103

 
—

 
103

 
2

 
—

 
$340 - $360
Elan
2019
 
81

 
—

 
81

 
—

 
—

 
$410 - $430
Mira
2019
 
92

 
—

 
92

 
1

 
—

 
$375 - $400
Sundance Future Active Adult
TBD
 
276

 
—

 
276

 
—

 
—

 
TBD
Avena
2018
 
84

 
13

 
71

 
12

 
13

 
$450 - $475
Tamarack
2018
 
84

 
31

 
53

 
28

 
31

 
$470 - $515
Braeburn
2018
 
82

 
—

 
82

 
10

 
—

 
$420 - $460
Canvas
2018
 
89

 
—

 
89

 
9

 
—

 
$400 - $425
Kadence
2018
 
85

 
—

 
85

 
4

 
—

 
$420 - $440
Newpark
2018
 
93

 
—

 
93

 
12

 
—

 
$445 - $495
Easton
2018
 
92

 
—

 
92

 
4

 
—

 
$475 - $530

- 51 -


Tournament Hills Future
TBD
 
268

 
—

 
268

 
—

 
—

 
TBD
Banning
2020
 
4,344

 
—

 
4,344

 
—

 
—

 
TBD
San Joaquin County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Bear Creek
TBD
 
1,252

 
—

 
1,252

 
—

 
—

 
TBD
Closed Communities
 
 
—

 
—

 
—

 
—

 
102

 
 
California Total
 
 
13,620

 
1,111

 
12,509

 
430

 
628

 
 
Nevada
 
 
 
 
 
 
 
 
 
 
 
 
 
Clark County:
 
 
 
 
 
 
 
 
 
 
 
 
 
North Peak
2015
 
176

 
174

 
2

 
1

 
52

 
$312 - $370
Castle Rock
2015
 
183

 
171

 
12

 
9

 
55

 
$365 - $455
Escala
2016
 
64

 
61

 
3

 
—

 
8

 
 $520 - $590
Strada
2017
 
143

 
34

 
109

 
24

 
10

 
 $420 - $470
Linea
2018
 
123

 
3

 
120

 
58

 
3

 
$360 - $400
Inspirada Town Center
2020
 
160

 
—

 
160

 
—

 
—

 
 TBD
Meridian
2016
 
62

 
59

 
3

 
3

 
17

 
 $595 - $690
Pebble Estate Future
TBD
 
8

 
—

 
8

 
—

 
—

 
 TBD
Encanto
2016
 
51

 
47

 
4

 
2

 
13

 
 $475 - $530
Luma
2018
 
63

 
20

 
43

 
28

 
20

 
 $490 - $530
Evolve
2019
 
74

 
—

 
74

 
—

 
—

 
 TBD
Horizon Terrace
2014
 
165

 
164

 
1

 
—

 
29

 
 $420 - $470
Corterra
2018
 
112

 
—

 
112

 
7

 
—

 
 $460 - $550
Keystone
2017
 
70

 
57

 
13

 
7

 
33

 
 $460 - $550
Cobalt
2017
 
124

 
34

 
90

 
10

 
29

 
 $375 - $450
Onyx
2018
 
71

 
2

 
69

 
8

 
2

 
 $450 - $485
Axis
2017
 
78

 
22

 
56

 
24

 
12

 
 $850 - $1,125
Midnight Ridge
2019
 
104

 
—

 
104

 
—

 
—

 
 $540 - $585
Pivot
2017
 
88

 
40

 
48

 
4

 
30

 
 $405 - $470
Strada at Pivot
2,017
 
27

 
24

 
3

 
2

 
17

 
 $450 - $480
Nova Ridge
2017
 
108

 
21

 
87

 
33

 
20

 
 $665 - $825
Tera Luna
2018
 
116

 
2

 
114

 
4

 
2

 
 $545 - $660
Indogo
2018
 
202

 
—

 
202

 
26

 
—

 
 $315 - $360
Larimar
2018
 
170

 
—

 
170

 
4

 
—

 
 $380 - $420
Blackstone
2018
 
140

 
—

 
140

 
14

 
—

 
 $400 - $500
Cactus/Jones
2019
 
54

 
—

 
54

 
—

 
—

 
 $350 - $375
Sandalwood
2020
 
117

 
—

 
117

 
—

 
—

 
 $685 - $815
Closed Communities
N/A
 
—

 
—

 
—

 
—

 
25

 
 
Nevada Total
 
 
2,853

 
935

 
1,918

 
268

 
377

 
 
Pardee Total
 
 
16,473

 
2,046

 
14,427

 
698

 
1,005

 
 


- 52 -


Quadrant Homes 
County, Project, City
Year of
First
Delivery(1)
 
Total
Number of
Lots(2)
 
Cumulative
Homes
Delivered
as of
September 30,
2018
 
Lots
Owned as of
September 30, 2018(3)
 
Backlog as of
September 30,
2018(4)(5)
 
Homes
Delivered
for the Nine
Months Ended
September 30,
2018
 
Sales Price
Range
(in thousands)(6)
Washington
 
 
 
 
 
 
 
 
 
 
 
 
 
Snohomish County:
 
 
 
 
 
 
 
 
 
 
 
 
 
The Grove at Canyon Park, Bothell
2017
 
60

 
59

 
1

 
1

 
21

 
$760
Greenstone Heights, Bothell
2017
 
41

 
21

 
20

 
15

 
19

 
$970 - $1,150
Grove North, Bothell
2019
 
43

 
—

 
43

 
—

 
—

 
$765 - $900
Grove South, Bothell
2019
 
9

 
—

 
9

 
—

 
—

 
$785 - $820
King County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Vareze, Kirkland
2019
 
82

 
—

 
82

 
—

 
—

 
$700 - $940
Hazelwood Ridge, Newcastle
2017
 
30

 
28

 
2

 
1

 
6

 
$1,059 - $1,069
Inglewood Landing, Sammamish
2018
 
21

 
—

 
21

 
8

 
—

 
$1,150 - $1,330
Jacobs Landing, Sammamish
2017
 
20

 
12

 
8

 
4

 
11

 
$1,160 - $1,280
Kirkwood Terrace, Sammamish
2018
 
12

 
—

 
12

 
6

 
—

 
$1,800 - $2,300
English Landing P2, Redmond
2017
 
25

 
24

 
1

 
—

 
17

 
$1,272
English Landing P1, Redmond
2018
 
50

 
12

 
38

 
27

 
12

 
$1,170 - $1,425
Cedar Landing, North Bend
2019
 
138

 
—

 
138

 
—

 
—

 
$685 - $860
Monarch Ridge, Sammamish
2019
 
59

 
—

 
59

 
—

 
—

 
$970 - $1,145
Overlook at Summit Park, Maple Valley
2019
 
126

 
—

 
126

 
—

 
—

 
$590 - $745
Ray Meadows, Redmond
2018
 
27

 
—

 
27

 
8

 
—

 
$1,165 - $1,390
Wynstone, Federal Way
TBD
 
1

 
—

 
1

 
—

 
—

 
TBD
Canton Crossing, Maple Valley
2017
 
51

 
47

 
4

 
3

 
31

 
$585 - $650
Aurea, Sammamish
2019
 
41

 
—

 
41

 
—

 
—

 
$710 - $895
Aldea, Newcastle
2019
 
129

 
—

 
129

 
10

 
—

 
$685 - $925
Lario, Bellevue
2019
 
46

 
—

 
46

 
—

 
—

 
$810 - $1,140
Soundview Manor, Federal Way
2018
 
21

 
—

 
21

 
2

 
—

 
$566 - $660
Eagles Glen, Sammamish
2019
 
10

 
—

 
10

 
—

 
—

 
$1,100 - $1,350
Finn Meadows, Kirkland
2019
 
5

 
—

 
5

 
—

 
—

 
$990 - $1,100
Pierce County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Harbor Hill S-5/6, Gig Harbor
2017
 
72

 
50

 
22

 
15

 
27

 
$453 - $523
Harbor Hill S-2, Gig Harbor
2017
 
41

 
27

 
14

 
11

 
20

 
$425 - $480
Kitsap County:
 
 
 
 
 
 
 
 
—

 
—

 
 
Mountain Aire, Poulsbo
2016
 
145

 
127

 
18

 
18

 
50

 
$439 - $499
Winslow Grove, Bainbridge Island
2018
 
19

 
—

 
19

 
—

0
—

 
$1,047 - $1,192
Blue Heron, Poulsbo
2020
 
85

 
—

 
85

 
—

0
—

 
$474 - $649
Closed Communities
N/A
 
—

 
—

 
—

 
—

 
27

 
N/A
Washington Total
 
 
1,409

 
407

 
1,002

 
129

 
241

 
 
Quadrant Total
 
 
1,409

 
407

 
1,002

 
129

 
241

 
 






- 53 -


Trendmaker Homes
County, Project, City
Year of
First
Delivery(1)
 
Total
Number of
Lots(2)
 
Cumulative
Homes
Delivered
as of
September 30,
2018
 
Lots
Owned as of
September 30, 2018(3)
 
Backlog as of
September 30,
2018(4)(5)
 
Homes
Delivered
for the Nine
Months Ended
September 30,
2018
 
Sales Price
Range
(in thousands)(6)
Texas
 
 
 
 
 
 
 
 
 
 
 
 
 
Brazoria County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pomona, Manvel
2015
 
49

 
30

 
19

 
2

 
9

 
$375 - $471
Rise Meridiana
2016
 
47

 
26

 
21

 
2

 
9

 
$292 - $350
Fort Bend County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cross Creek Ranch 60', Fulshear
2013
 
48

 
28

 
20

 
3

 
13

 
$370 - $470
Cross Creek Ranch 65', Fulshear
2013
 
81

 
60

 
21

 
7

 
9

 
$437 - $509
Cross Creek Ranch 70', Fulshear
2013
 
111

 
86

 
25

 
5

 
14

 
$490 - $561
Cross Creek Ranch 80', Fulshear
2013
 
71

 
46

 
25

 
12

 
6

 
$557 - $676
Cross Creek Ranch 90', Fulshear
2013
 
37

 
30

 
7

 
3

 
4

 
$695 - $759
Fulshear Run 1/2 Acre, Richmond
2016
 
54

 
27

 
27

 
12

 
9

 
$573 - $679
Harvest Green 75', Richmond
2015
 
38

 
31

 
7

 
3

 
11

 
$446 - $543
Sienna Plantation 85', Missouri City
2015
 
39

 
23

 
16

 
6

 
7

 
$546 - $645
Villas at Aliana, Richmond
2013
 
117

 
116

 
1

 
—

 
10

 
$465
Harris County:
 
 
 
 
 
 
 
 
 
 
 
 
 
The Groves, Humble
2015
 
108

 
64

 
44

 
5

 
9

 
$323 - $524
Lakes of Creekside
2015
 
38

 
12

 
26

 
3

 
3

 
$460 - $611
Bridgeland '80, Cypress
2015
 
141

 
116

 
25

 
9

 
15

 
$549 - $636
Bridgeland Patio, Cypress 60'
2017
 
32

 
29

 
3

 
2

 
14

 
$429
Bridgeland 70'
2018
 
30

 
3

 
27

 
1

 
3

 
$461 - $543
Villas at Bridgeland 50'
2018
 
25

 
—

 
25

 
3

 
—

 
$362 - $395
Elyson 70', Cypress
2016
 
20

 
12

 
8

 
4

 
4

 
$400 - $544
Hidden Arbor, Cypress
2015
 
129

 
122

 
7

 
2

 
34

 
$395 - $550
Clear Lake, Houston
2015
 
778

 
401

 
377

 
69

 
80

 
$335 - $663
Montgomery County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Woodtrace, Woodtrace
2014
 
39

 
36

 
3

 
1

 
6

 
$512 - $532
Northgrove, Tomball
2015
 
25

 
7

 
18

 
—

 
2

 
TBD
Bender's Landing Estates, Spring
2014
 
104

 
83

 
21

 
6

 
23

 
$511 - $584
The Woodlands, Creekside Park
2015
 
114

 
62

 
52

 
12

 
23

 
$413 - $639
Royal Brook, Porter
2019
 
12

 
—

 
12

 
—

 
—

 
TBD
Waller County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cane Island, Katy
2015
 
23

 
22

 
1

 
1

 
2

 
$525 - $634
LakeHouse
TBD
 
350

 
—

 
350

 
—

 
—

 
TBD
Williamson County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Crystal Falls
2016
 
29

 
24

 
5

 
1

 
8

 
$595
Rancho Sienna 60'
2016
 
38

 
14

 
24

 
4

 
10

 
$340 - $420
Rancho Sienna 80'
2018
 
5

 
—

 
5

 
3

 
—

 
$456 - $517
Highlands at Mayfield Ranch 50'
2019
 
36

 
5

 
31

 
2

 
—

 
$280 - $344
Highlands at Mayfield Ranch 60'
2019
 
23

 
—

 
23

 
3

 
—

 
$340 - $406
Rancho Sienna 50'
2019
 
14

 
—

 
14

 
—

 
—

 
$291 - $348
Palmera Ridge
2019
 
21

 
—

 
21

 
—

 
—

 
TBD
Hays County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Belterra 60', Austin
2017
 
36

 
23

 
13

 
2

 
14

 
$375 - $466
Belterra 80', Austin
2016
 
37

 
32

 
5

 
1

 
14

 
$535 - $603
Headwaters, Dripping Springs
2017
 
30

 
18

 
12

 
9

 
11

 
$399 - $450
Travis County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Lakes Edge 70'
2018
 
45

 
7

 
38

 
34

 
7

 
$652 - $792
Lakes Edge 80'
2018
 
14

 
—

 
14

 
7

 
—

 
$650 - $835
Closed Communities
N/A
 
—

 
—

 
—

 
—

 
6

 
 
Texas Total
 
 
2,988

 
1,595

 
1,393

 
239

 
389

 
 
Trendmaker Homes Total
 
 
2,988

 
1,595

 
1,393

 
239

 
389

 
 


- 54 -


TRI Pointe Homes
 
County, Project, City
Year of
First
Delivery(1)
 
Total
Number of
Lots(2)
 
Cumulative
Homes
Delivered
as of
September 30,
2018
 
Lots
Owned as of
September 30, 2018(3)
 
Backlog as of
September 30,
2018(4)(5)
 
Homes
Delivered
for the Nine
Months Ended
September 30,
2018
 
Sales Price
Range
(in thousands)(6)
Southern California
 
 
 
 
 
 
 
 
 
 
 
 
 
Orange County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Aria, Rancho Mission Viejo
2016
 
151

 
128

 
23

 
19

 
33

 
 $623 - $716
Viridian
2018
 
72

 
—

 
72

 
23

 
—

 
 $890 - $982
Carlisle 10-Pack Garden Court, Irvine
2017
 
74

 
72

 
2

 
2

 
49

 
 $670 - $849
Sterling Row Townhomes, Irvine
2017
 
96

 
78

 
18

 
18

 
56

 
 $572 - $779
Varenna at Orchard Hills, Irvine
2016
 
77

 
60

 
17

 
20

 
21

 
 $1,170 - $1,272
Alston, Anaheim
2017
 
75

 
43

 
32

 
26

 
24

 
 $805 - $861
StrataPointe, Buena Park
2017
 
149

 
104

 
45

 
26

 
50

 
 $515 - $696
Lyric
2019
 
70

 
—

 
70

 
6

 
—

 
 $790 - $928
Citron at Bedford
2019
 
35

 
—

 
35

 
3

 
—

 
 
San Diego County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Prism at Weston
2018
 
142

 
14

 
128

 
20

 
14

 
 $590 - $624
Talus at Weston
2018
 
63

 
19

 
44

 
16

 
19

 
 $675 - $717
Riverside County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Terrassa Court, Corona
2015
 
94

 
92

 
2

 
1

 
25

 
 $421 - $499
Terrassa Villas, Corona
2015
 
52

 
38

 
14

 
10

 
24

 
 $472 - $549
Cypress Ridge
2019
 
245

 
—

 
245

 
—

 
—

 
 
Los Angeles County:
 
 
 
 
 
 
 
 
 
 
 
 
 
VuePointe, El Monte
2017
 
102

 
69

 
33

 
24

 
55

 
 $446 - $569
Bradford @ Rosedale, Azusa
2017
 
52

 
41

 
11

 
9

 
26

 
 $816 - $906
Lucera at Aliento
2017
 
67

 
50

 
17

 
10

 
27

 
 $622 - $648
Tierno at Aliento
2017
 
63

 
48

 
15

 
1

 
21

 
 $667 - $695
Tierno II at Aliento
2018
 
63

 
2

 
61

 
12

 
2

 
 $642 - $703
Paloma at West Creek
2018
 
155

 
19

 
136

 
29

 
19

 
 $444 - $496
San Bernardino County:
 
 
 
 
 
 
 
 
 
 
 
 
 
St. James at Park Place, Ontario
2015
 
125

 
119

 
6

 
—

 
10

 
 $509 - $560
St. James III at Park Place, Ontario
2018
 
82

 
—

 
82

 
35

 
—

 
 $509 - $560
The Preserve
2019
 
246

 
—

 
246

 
—

 
—

 
 
Closed Communities
N/A
 
—

 
—

 
—

 
—

 
30

 
 
Southern California Total
 
 
2,350

 
996

 
1,354

 
310

 
505

 
 
Northern California
 
 
 
 
 
 
 
 
 
 
 
 
 
Contra Costa County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Marquette at Barrington, Brentwood
2015
 
90

 
89

 
1

 
1

 
14

 
 $695 - $730
Wynstone at Barrington, Brentwood
2017
 
92

 
62

 
30

 
11

 
26

 
 $536 - $667
Santa Clara County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Madison Gate
2018
 
65

 
13

 
52

 
7

 
13

 
 $847 - $1,184
Luchessa
2019
 
49

 
—

 
49

 
—

 
—

 
 $755 - $799
The Grove
2019
 
64

 
—

 
64

 
—

 
—

 
 $850 - $920
Solano County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Redstone, Vacaville
2015
 
141

 
134

 
7

 
6

 
28

 
 $505 - $573
Green Valley-Bloom, Fairfield
2018
 
91

 
22

 
69

 
9

 
22

 
 $555 - $605
Green Valley-Harvest, Fairfield
2018
 
56

 
19

 
37

 
9

 
19

 
 $575 - $640
Villages of Fairfield
2018
 
133

 
—

 
133

 
—

 
—

 
 $455 - $490
San Joaquin County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Sundance, Mountain House
2015
 
113

 
107

 
6

 
1

 
2

 
 $668 - $741
Sundance II, Mountain House
2017
 
138

 
42

 
96

 
17

 
39

 
 $668 - $741
Alameda County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, Alameda Landing
2018
 
2

 
—

 
2

 
—

 
—

 
$575
Blackstone at the Cannery, Hayward SFA
2016
 
105

 
98

 
7

 
6

 
24

 
$666 - $776
Slate at Jordan Ranch, Dublin
2017
 
56

 
44

 
12

 
7

 
28

 
$1,125 - $1,225

- 55 -


Onyx at Jordan Ranch, Dublin
2017
 
105

 
34

 
71

 
20

 
25

 
$934 - $986
Quartz at Jordan Ranch, Dublin
2018
 
45

 
11

 
34

 
19

 
11

 
$958 - $1,098
Mission Stevenson, Fremont
2018
 
77

 
7

 
70

 
34

 
7

 
$858 - $1,177
Palm Avenue, Fremont
2018
 
31

 
—

 
31

 
1

 
—

 
$2,250 - $2,392
Pleasant Hill
2019
 
44

 
—

 
44

 
—

 
—

 
$890 - $960
Parkside, Oakland
2019
 
128

 
—

 
128

 
—

 
—

 
$720 - $805
Sacramento County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Natomas
2019
 
94

 
—

 
94

 
—

 
—

 
$344 - $410
Twelve Bridges
2019
 
102

 
—

 
102

 
—

 
—

 
$432 - $528
San Francisco County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cambridge Street SFA
2020
 
54

 
—

 
54

 
—

 
—

 
$985 - $1,215
Closed Communities
N/A
 
—

 
—

 
—

 
—

 
38

 
 
Northern California Total
 
 
1,875

 
682

 
1,193

 
148

 
296

 
 
California Total
 
 
4,225

 
1,678

 
2,547

 
458

 
801

 
 
Colorado
 
 

 

 

 

 

 
 
Douglas County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Terrain Ravenwood Village (3500)
2018
 
157

 
24

 
133

 
33

 
24

 
 $366 - $425
Terrain Ravenwood Village (4000)
2018
 
100

 
24

 
76

 
17

 
24

 
 $400 - $466
Jefferson County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Candelas 6000 Series, Arvada
2015
 
76

 
74

 
2

 
1

 
21

 
 $516 - $671
Candelas 3500 Series, Arvada
2016
 
97

 
66

 
31

 
27

 
30

 
 $398 - $454
Candelas 5000 Series, Arvada
2017
 
62

 
32

 
30

 
20

 
23

 
 $499 - $584
Candelas 4000 Series, Arvada
2018
 
98

 
—

 
98

 
14

 
—

 
 $458 - $520
Crown Pointe, Westminster
2019
 
64

 
—

 
64

 
—

 
—

 
 $430 - $490
Arapahoe County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Whispering Pines, Aurora
2015
 
115

 
56

 
59

 
18

 
29

 
 $572 - $656
Adams County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Amber Creek, Thornton
2017
 
121

 
54

 
67

 
39

 
25

 
 $386 - $477
Closed Communities
N/A
 
—

 
—

 
—

 
—

 
6

 
 
Colorado Total
 
 
890

 
330

 
560

 
169

 
182

 
 
TRI Pointe Total
 
 
5,115

 
2,008

 
3,107

 
627

 
983

 
 


- 56 -


Winchester Homes
County, Project, City
Year of
First
Delivery(1)
 
Total
Number of
Lots(2)
 
Cumulative
Homes
Delivered
as of
September 30,
2018
 
Lots
Owned as of
September 30, 2018(3)
 
Backlog as of
September 30,
2018(4)(5)
 
Homes
Delivered
for the Nine
Months Ended
September 30,
2018
 
Sales Price
Range
(in thousands)(6)
Maryland
 
 
 
 
 
 
 
 
 
 
 
 
 
Anne Arundel County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Two Rivers Townhomes, Crofton
2017
 
84

 
33

 
51

 
13

 
25

 
$450 - $560
Two Rivers Cascades SFD, Crofton
2018
 
31

 
11

 
20

 
6

 
11

 
$575 - $625
Watson's Glen, Millersville
2015
 
103

 
4

 
99

 
—

 
—

 
Closed
Frederick County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Landsdale, Monrovia
 
 
—

 
 
 
 
 
 
 
 
 
 
Landsdale SFD
2015
 
222

 
112

 
110

 
19

 
26

 
$495 - $597
Landsdale Townhomes
2015
 
100

 
70

 
30

 
6

 
23

 
$330 - $383
Landsdale TND Neo SFD
2015
 
77

 
39

 
38

 
5

 
12

 
$440 - $473
Montgomery County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cabin Branch, Clarksburg
 
 
 
 
 
 
 
 
 
 
 
 
  
Cabin Branch SFD
2014
 
359

 
183

 
176

 
25

 
39

 
 $510 - $745
Cabin Branch Avenue Townhomes
2017
 
121

 
43

 
78

 
8

 
19

 
$420 - $485
Cabin Branch Townhomes
2014
 
507

 
267

 
240

 
12

 
46

 
 $393 - $438
Preserve at Stoney Spring
N/A
 
5

 
—

 
5

 
—

 
—

 
 NA
Poplar Run SFD, Silver Spring
2010
 
305

 
298

 
7

 
6

 
17

 
 $635 - $770
Glenmont MetroCenter, Silver Spring
2016
 
171

 
63

 
108

 
14

 
27

 
 $435 - $513
Chapman Row, Rockville
2019
 
61

 
—

 
61

 
—

 
—

 
 TBD
Randolph Farms, Rockville
2019
 
104

 
—

 
104

 
—

 
—

 
 TBD
Closed Communities
N/A
 
—

 
—

 
—

 
—

 
8

 
  
Maryland Total
 
 
2,250

 
1,123

 
1,127

 
114

 
253

 
 
Virginia
 
 
 
 
 
 
 
 
 
 
 
 
 
Fairfax County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Stuart Mill & Timber Lake, Oakton
2014
 
14

 
13

 
1

 
1

 
4

 
$1,363 - $1,675
Stuart Mill, Oakton
N/A
 
5

 
—

 
5

 
—

 
—

 
NA
Westgrove, Fairfax
2018
 
24

 
—

 
24

 
4

 
—

 
$996 - $1,102
West Oaks Corner, Fairfax
2019
 
188

 
—

 
188

 
—

 
—

 
TBD
Prince William County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Villages of Piedmont, Haymarket
2015
 
168

 
153

 
15

 
15

 
44

 
$373 - $460
Loudoun County:
 
 
 
 
 
 
 
 
 
 
 
 
 
Brambleton, Ashburn
 
 
 
 
 
 
 
 
 
 
 
 
 
West Park SFD
2018
 
36

 
14

 
22

 
12

 
14

 
$708 - $724
Birchwood AA
2018
 
16

 
2

 
14

 
15

 
2

 
$574 - $629
Vistas at Lansdowne, Lansdowne
2015
 
120

 
91

 
29

 
20

 
20

 
$536 - $576
Willowsford Grant II, Aldie
2016
 
49

 
16

 
33

 
11

 
6

 
$950 - $1,226
Willowsford Greens
N/A
 
2

 
—

 
2

 
—

 
—

 
NA
Closed Communities
N/A
 
—

 
—

 
—

 
—

 
—

 
 
Virginia Total
 
 
622

 
289

 
333

 
78

 
90

 
 
Winchester Total
 
 
2,872

 
1,412

 
1,460

 
192

 
343

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined Company Total
 
 
32,234

 
8,344

 
23,890

 
2,101

 
3,344

 
 
__________
(1) 
Year of first delivery for future periods is based upon management’s estimates and is subject to change.
(2) 
The number of homes to be built at completion is subject to change, and there can be no assurance that we will build these homes.
(3) 
Owned lots as of September 30, 2018 include owned lots in backlog as of September 30, 2018.
(4) 
Backlog consists of homes under sales contracts that have not yet been delivered, and there can be no assurance that delivery of sold homes will occur.
(5) 
Of the total homes subject to pending sales contracts that have not been delivered as of September 30, 2018, 1,642 homes are under construction, 245 homes have completed construction, and 214 homes have not started construction.

- 57 -


(6) 
Sales price range reflects base price only and excludes any lot premium, buyer incentives and buyer-selected options, which may vary from project to project. Sales prices for homes required to be sold pursuant to affordable housing requirements are excluded from sales price range. Sales prices reflect current pricing and might not be indicative of past or future pricing.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, which have been prepared in accordance with GAAP. Our condensed notes to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q and the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 describe the significant accounting policies essential to our unaudited condensed consolidated financial statements. The preparation of our financial statements requires our management to make estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions that we have used are appropriate and correct based on information available at the time they were made. These estimates, judgments and assumptions can affect our reported assets and liabilities as of the date of the financial statements, as well as the reported revenues and expenses during the period presented. If there is a material difference between these estimates, judgments and assumptions and actual facts, our financial statements may be affected.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require our judgment in its application. There are areas in which our judgment in selecting among available alternatives would not produce a materially different result, but there are some areas in which our judgment in selecting among available alternatives would produce a materially different result. See the condensed notes to the unaudited consolidated financial statements that contain additional information regarding our accounting policies and other disclosures.
Except for accounting policies related to our adoption of ASC 606, there have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. See Note 1, Organization, Basis of Presentation and Summary of Significant Accounting Policies, to the accompanying condensed notes to unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q for the critical accounting policies resulting from our adoption of ASC 606.
Recently Issued Accounting Standards
See Note 1, Organization, Basis of Presentation and Summary of Significant Accounting Policies, to the accompanying condensed notes to unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.

Item 3.
Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks related to fluctuations in interest rates on our outstanding debt.  We did not utilize swaps, forward or option contracts on interest rates or commodities, or other types of derivative financial instruments as of or during the nine months ended September 30, 2018. We did not enter into during the nine months ended September 30, 2018, and currently do not hold, derivatives for trading or speculative purposes.

Item 4.
Controls and Procedures

We have established disclosure controls and procedures to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and accumulated and communicated to management, including the Chief Executive Officer (the “Principal Executive Officer”) and Chief Financial Officer (the “Principal Financial Officer”), as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of senior management, including our Principal Executive Officer and Principal Financial Officer, we evaluated our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2018.

- 58 -


Our management, including our Principal Executive Officer and Principal Financial Officer, has evaluated our internal control over financial reporting to determine whether any change occurred during the three months ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the three months ended September 30, 2018.

- 59 -


PART II. OTHER INFORMATION

Item 1.
Legal Proceedings
The information required with respect to this item can be found under Note 13, Commitments and Contingencies-Legal Matters, to the accompanying condensed notes to unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q and is incorporated by reference into this Item 1.

Item 1A.
Risk Factors

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.  If any of the risks discussed in our Annual Report on Form 10-K occur, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected, in which case the trading price of our common stock could decline significantly and you could lose all or a part of your investment.  Some statements in this Quarterly Report on Form 10-Q constitute forward-looking statements.  Please refer to Part I, Item 2 of this Quarterly Report on Form 10-Q entitled “Cautionary Note Concerning Forward-Looking Statements.”

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
On February 16, 2018, our board of directors discontinued and cancelled the 2017 Repurchase Program and approved the 2018 Repurchase Program, authorizing the repurchase of shares of common stock with an aggregate value of up to $100 million through March 31, 2019. On August 21, 2018, our board of directors authorized the repurchase of up to an additional $100 million through March 31, 2019, increasing the aggregate value of shares of common stock authorized to be repurchased under the 2018 Repurchase Program to $200 million from $100 million. Purchases of common stock pursuant to the 2018 Repurchase Program may be made in open market transactions effected through a broker-dealer at prevailing market prices, in block trades, or by other means in accordance with federal securities laws, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 under the Exchange Act. We are not obligated under the 2018 Repurchase Program to repurchase any specific number or dollar amount of shares of common stock, and we may modify, suspend or discontinue the 2018 Repurchase Program at any time. Our management will determine the timing and amount of repurchase in its discretion based on a variety of factors, such as the market price of our common stock, corporate requirements, general market economic conditions and legal requirements. During the three and nine months ended September 30, 2018, we repurchased and retired an aggregate of 9.9 million shares of our common stock under the 2018 Repurchase Program for $139.3 million.
During the three months ended September 30, 2018, we repurchased and retired the following shares pursuant to our 2018 Repurchase Program:
 
Total number of shares purchased
 
Average price paid per share
 
Total number of shares purchased as part of publicly announced program
 
Approximate dollar value of shares that may yet be purchased under the program (1)
July 1, 2018 to July 31, 2018
234,800

 
$
14.66

 
234,800

 
$
96,556,705

August 1, 2018 to August 31, 2018
6,420,600

 
$
14.23

 
6,420,600

 
$
105,215,650

September 1, 2018 to September 30, 2018
3,196,609

 
$
13.94

 
3,196,609

 
$
60,651,729

Total
9,852,009

 
$
14.14

 
9,852,009

 
 
__________    
(1)     The Company announced the authorization of the 2018 Repurchase Program on February 20, 2018 and the increase in authorization on August 21, 2018. During the three months ended September 30, 2018, we repurchased and retired an aggregate of 9.9 million shares of our common stock under the 2018 Repurchase Program for $139.3 million.


- 60 -



Item 6.
Exhibits 
Exhibit
Number
 
Exhibit Description
 
 
 
 
Amended and Restated Certificate of Incorporation of TRI Pointe Group, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K (filed July 7, 2015))
 
 
 
 
Amended and Restated Bylaws of TRI Pointe Group, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (filed October 27, 2016))
 
 
 
 
Chief Executive Officer Section 302 Certification of the Sarbanes-Oxley Act of 2002
 
 
 
 
Chief Financial Officer Section 302 Certification of the Sarbanes-Oxley Act of 2002
 
 
 
 
Chief Executive Officer Section 906 Certification of the Sarbanes-Oxley Act of 2002
 
 
 
 
Chief Financial Officer Section 906 Certification of the Sarbanes-Oxley Act of 2002
 
 
 
101
 
The following materials from TRI Pointe Group, Inc.’s Quarterly Report on Form 10-Q for the nine months ended September 30, 2018, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Cash Flows, and (v) Condensed Notes to Consolidated Financial Statement.


- 61 -


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
TRI Pointe Group, Inc.
 
 
 
 
By:
/s/ Douglas F. Bauer
 
 
Douglas F. Bauer
 
 
Chief Executive Officer
 
By:
/s/ Michael D. Grubbs
 
 
Michael D. Grubbs
Date: October 24, 2018
 
Chief Financial Officer

- 62 -