TPH 10-Q Quarterly Report March 31, 2019 | Alphaminr
TRI Pointe Group, Inc.
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TPH 10-Q Quarter ended March 31, 2019

Balance Sheet
Cash Flow
Income Statement
TRI POINTE GROUP, INC.
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10-Q 1 tphq110-q3312019.htm 10-Q Document


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 March 31, 2019
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
_____________________________________________________________________________________________

logoa07.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
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
____________________________________________________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes 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
142,210,147 shares of the registrant's common stock were issued and outstanding as of April 12, 2019.

- 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 consolidated subsidiaries.



- 2 -


TRI POINTE GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
March 31, 2019
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)
March 31, 2019
December 31, 2018
(unaudited)
Assets
Cash and cash equivalents
$
148,782

$
277,696

Receivables
58,234

51,592

Real estate inventories
3,242,678

3,216,059

Investments in unconsolidated entities
4,191

5,410

Goodwill and other intangible assets, net
160,293

160,427

Deferred tax assets, net
67,761

67,768

Other assets
173,956

105,251

Total assets
$
3,855,895

$
3,884,203

Liabilities
Accounts payable
$
66,605

$
81,313

Accrued expenses and other liabilities
319,791

335,149

Senior notes, net
1,412,463

1,410,804

Total liabilities
1,798,859

1,827,266

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 March 31, 2019 and
December 31, 2018, respectively
—

—

Common stock, $0.01 par value, 500,000,000 shares authorized;
142,210,147 and 141,661,713 shares issued and outstanding at
March 31, 2019 and December 31, 2018, respectively
1,422

1,417

Additional paid-in capital
658,743

658,720

Retained earnings
1,396,858

1,396,787

Total stockholders’ equity
2,057,023

2,056,924

Noncontrolling interests
13

13

Total equity
2,057,036

2,056,937

Total liabilities and equity
$
3,855,895

$
3,884,203

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 March 31,
2019
2018
Homebuilding:
Home sales revenue
$
492,703

$
582,572

Land and lot sales revenue
1,029

223

Other operations revenue
598

598

Total revenues
494,330

583,393

Cost of home sales
421,536

450,502

Cost of land and lot sales
1,495

503

Other operations expense
590

602

Sales and marketing
38,989

38,283

General and administrative
38,597

36,814

Homebuilding (loss) income from operations
(6,877
)
56,689

Equity in loss of unconsolidated entities
(25
)
(468
)
Other income, net
6,241

171

Homebuilding (loss) income before income taxes
(661
)
56,392

Financial Services:
Revenues
302

283

Expenses
321

137

Equity in income of unconsolidated entities
775

1,002

Financial services income before income taxes
756

1,148

Income before income taxes
95

57,540

Provision for income taxes
(24
)
(14,660
)
Net income
$
71

$
42,880

Earnings per share


Basic
$
0.00

$
0.28

Diluted
$
0.00

$
0.28

Weighted average shares outstanding
Basic
141,865,270

151,464,547

Diluted
142,390,163

152,775,851

See accompanying condensed notes to the unaudited consolidated financial statements.


- 4 -


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, 2018
141,661,713

$
1,417

$
658,720

$
1,396,787

$
2,056,924

$
13

$
2,056,937

Net income
—

—

—

71

71

—

71

Shares issued under share-based awards
548,434

5

193

—

198

—

198

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

—

(3,605
)
—

(3,605
)
—

(3,605
)
Stock-based compensation expense
—

—

3,435

—

3,435

—

3,435

Balance at March 31, 2019
142,210,147

$
1,422

$
658,743

$
1,396,858

$
2,057,023

$
13

$
2,057,036

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
—

—

—

(7,354
)
(7,354
)
—

(7,354
)
Net income
—

—

—

42,880

42,880

—

42,880

Shares issued under share-based awards
759,460

7

968

—

975

—

975

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

—

(6,049
)
—

(6,049
)
—

(6,049
)
Stock-based compensation expense
—

—

3,470

—

3,470

—

3,470

Distributions to noncontrolling interests, net
—

—

—

—

—

(1
)
(1
)
Balance at March 31, 2018
151,922,459

$
1,519

$
792,369

$
1,169,756

$
1,963,644

$
604

$
1,964,248


See accompanying condensed notes to the unaudited consolidated financial statements.




- 5 -


TRI POINTE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended March 31,
2019
2018
Cash flows from operating activities:
Net income
$
71

$
42,880

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization
5,085

5,488

Equity in income of unconsolidated entities, net
(750
)
(534
)
Deferred income taxes, net
7

5,024

Amortization of stock-based compensation
3,435

3,470

Charges for impairments and lot option abandonments
5,202

248

Changes in assets and liabilities:
Real estate inventories
(29,695
)
(87,107
)
Receivables
(6,642
)
70,351

Other assets
(5,476
)
2,308

Accounts payable
(14,708
)
3,379

Accrued expenses and other liabilities
(73,446
)
2,165

Returns on investments in unconsolidated entities, net
1,992

2,214

Net cash (used in) provided by operating activities
(114,925
)
49,886

Cash flows from investing activities:
Purchases of property and equipment
(7,224
)
(2,170
)
Proceeds from sale of property and equipment
7

—

Investments in unconsolidated entities
(231
)
(947
)
Net cash used in investing activities
(7,448
)
(3,117
)
Cash flows from financing activities:
Repayment of debt
(10
)
—

Debt issuance costs
(3,124
)
—

Distributions to noncontrolling interests
—

(1
)
Proceeds from issuance of common stock under share-based awards
198

975

Minimum tax withholding paid on behalf of employees for share-based awards
(3,605
)
(6,049
)
Net cash used in financing activities
(6,541
)
(5,075
)
Net (decrease) increase in cash and cash equivalents
(128,914
)
41,694

Cash and cash equivalents–beginning of period
277,696

282,914

Cash and cash equivalents–end of period
$
148,782

$
324,608

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 is engaged in the design, construction and sale of innovative single-family attached and detached homes through its portfolio of six quality brands across ten states, including Maracay in Arizona, Pardee Homes in California and Nevada, Quadrant Homes in Washington, Trendmaker Homes in Texas, TRI Pointe Homes in California, Colorado and the Carolinas and Winchester Homes in Maryland and Virginia.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), 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, 2018 . 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 months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019 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 March 31, 2019 and December 31, 2018 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.
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Codified as “ASC 606”). Under ASC 606, we apply the following steps to determine the timing and amount of revenue to recognize: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.
Home sales revenue
We generate the majority of our total revenues from home sales, which consists of our core business operation of building and delivering completed homes to homebuyers. Home sales revenue and related profit is generally recognized when title to and possession of the home is transferred to the homebuyer at the home closing date. Our performance obligation to deliver the agreed-upon home is generally satisfied in less than one year from the original contract date. 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 are 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

- 7 -


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 842, Leases . We do not recognize a material profit on this ground lease.
Financial services revenues
TRI Pointe Solutions is a reportable segment and is comprised of our TRI Pointe Connect mortgage financing operations, TRI Pointe Assurance title services operations, and TRI Pointe Advantage property and casualty insurance agency operations.
Mortgage financing operations
TRI Pointe Connect was formed as a joint venture with an established mortgage lender and is accounted for under the equity method of accounting.  We record a percentage of income earned by TRI Pointe Connect based on our ownership percentage in this joint venture. 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. 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. 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.
Recently Issued Accounting Standards Not Yet Adopted
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 the adoption of ASU 2017-04 to have a material impact on our financial statements.

- 8 -


Adoption of New Accounting Standards
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Codified as “ASC 842”), which requires an entity to recognize a lease right-of-use asset and lease liability on the balance sheet for the rights and obligations created by leases with durations of greater than 12 months. Right-of-use lease assets represent our right to use the underlying asset for the lease term and the lease obligation represents our commitment to make the lease payments arising from the lease. The guidance also requires more disclosures about leases in the notes to financial statements. We adopted ASC 842 on January 1, 2019, using a modified retrospective approach resulting in the recognition of a cumulative effect adjustment to the opening balance sheet of $57.4 million , which included a lease right-of-use asset offset by a lease liability on our consolidated balance sheet. No prior period adjustment was recorded. Additionally, we have elected the transition package of three practical expedients permitted under ASC 842, which among other things, allows us to retain the current operating classification for all of our existing leases prior the effective adoption date. For further details on the adoption of ASC 842, see Note 13, Commitments and Contingencies.


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, Colorado and the Carolinas; and Winchester Homes, consisting of operations in Maryland and Virginia.
Our TRI Pointe Solutions financial services operation is a reportable segment and is comprised of our TRI Pointe Connect mortgage financing operations, our TRI Pointe Assurance title services operations, and our TRI Pointe Advantage property and casualty insurance agency operations. For further details, see Note 1, Organization, 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 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.


- 9 -


Total revenues and income before income taxes for each of our reportable segments were as follows (in thousands):
Three Months Ended March 31,
2019
2018
Revenues
Maracay
$
39,561

$
58,455

Pardee Homes
134,863

180,470

Quadrant Homes
43,871

61,903

Trendmaker Homes
70,821

41,408

TRI Pointe Homes
171,791

190,420

Winchester Homes
33,423

50,737

Total homebuilding revenues
494,330

583,393

Financial services
302

283

Total
$
494,632

$
583,676

Income (loss) before income taxes
Maracay
$
1,190

$
4,391

Pardee Homes
(791
)
39,191

Quadrant Homes
(2,639
)
8,140

Trendmaker Homes
(1,598
)
370

TRI Pointe Homes
10,209

14,531

Winchester Homes
(766
)
1,607

Corporate
(6,266
)
(11,838
)
Total homebuilding (loss) income before income taxes
(661
)
56,392

Financial services
756

1,148

Total
$
95

$
57,540


- 10 -


Total real estate inventories and total assets for each of our reportable segments, as of the date indicated, were as follows (in thousands):
March 31, 2019
December 31, 2018
Real estate inventories
Maracay
$
320,459

$
293,217

Pardee Homes
1,300,853

1,286,877

Quadrant Homes
273,621

279,486

Trendmaker Homes
284,734

271,061

TRI Pointe Homes
780,568

812,799

Winchester Homes
282,443

272,619

Total
$
3,242,678

$
3,216,059

Total assets
Maracay
$
352,968

$
318,703

Pardee Homes
1,404,466

1,391,503

Quadrant Homes
346,697

313,947

Trendmaker Homes
315,713

325,943

TRI Pointe Homes
966,252

987,610

Winchester Homes
312,636

298,602

Corporate
136,689

228,010

Total homebuilding assets
3,835,421

3,864,318

Financial services
20,474

19,885

Total
$
3,855,895

$
3,884,203



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 March 31,
2019
2018
Numerator:


Net income
$
71

$
42,880

Denominator:


Basic weighted-average shares outstanding
141,865,270

151,464,547

Effect of dilutive shares:

Stock options and unvested restricted stock units
524,893

1,311,304

Diluted weighted-average shares outstanding
142,390,163

152,775,851

Earnings per share


Basic
$
0.00

$
0.28

Diluted
$
0.00

$
0.28

Antidilutive stock options and unvested restricted stock units not included in diluted earnings per share
2,864,509

1,248,483


- 11 -



4.
Receivables
Receivables consisted of the following (in thousands):
March 31, 2019
December 31, 2018
Escrow proceeds and other accounts receivable, net
$
20,715

$
13,995

Warranty insurance receivable (Note 13)
37,519

37,597

Total receivables
$
58,234

$
51,592


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 $456,000 and $667,000 as of March 31, 2019 and December 31, 2018 , respectively.

5.
Real Estate Inventories
Real estate inventories consisted of the following (in thousands):
March 31, 2019
December 31, 2018
Real estate inventories owned:
Homes completed or under construction
$
1,037,271

$
959,911

Land under development
1,668,075

1,743,537

Land held for future development
203,476

201,874

Model homes
258,545

238,828

Total real estate inventories owned
3,167,367

3,144,150

Real estate inventories not owned:
Land purchase and land option deposits
75,311

71,909

Total real estate inventories not owned
75,311

71,909

Total real estate inventories
$
3,242,678

$
3,216,059

Homes completed or under construction is comprised of costs associated with homes in various stages of construction and includes direct construction and related land acquisition and land development costs. Land under development primarily consists of land acquisition and land development costs, which include capitalized interest and real estate taxes, associated with land undergoing improvement activity. Land held for future development principally reflects land acquisition and land development costs related to land where development activity has not yet begun or has been suspended, but is expected to occur in the future.
Real estate inventories not owned represents deposits related to land purchase and land and lot option agreements as well as consolidated inventory held by variable interest entities. For further details, see Note 7, Variable Interest Entities .
Interest incurred, capitalized and expensed were as follows (in thousands):
Three Months Ended March 31,
2019
2018
Interest incurred
$
23,373

$
21,520

Interest capitalized
(23,373
)
(21,520
)
Interest expensed
$
—

$
—

Capitalized interest in beginning inventory
$
184,400

$
176,348

Interest capitalized as a cost of inventory
23,373

21,520

Interest previously capitalized as a cost of
inventory, included in cost of sales
(14,333
)
(14,242
)
Capitalized interest in ending inventory
$
193,440

$
183,626


- 12 -


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 March 31,
2019
2018
Real estate inventory impairments
$
—

$
—

Land and lot option abandonments and pre-acquisition charges
5,202

248

Total
$
5,202

$
248

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. No real estate inventory impairments were recorded for the three-month periods ended March 31, 2019 or 2018, respectively.
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.

6.
Investments in Unconsolidated Entities
As of March 31, 2019 , 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 7% to 65% , depending on the investment, with no controlling interest held in any of these investments.
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.

- 13 -


Assets and liabilities of unconsolidated entities (in thousands):
March 31, 2019
December 31, 2018
Assets
Cash
$
10,261

$
13,337

Receivables
3,358

4,674

Real estate inventories
100,986

99,864

Other assets
746

811

Total assets
$
115,351

$
118,686

Liabilities and equity
Accounts payable and other liabilities
$
6,930

$
11,631

Company’s equity
4,191

5,410

Outside interests’ equity
104,230

101,645

Total liabilities and equity
$
115,351

$
118,686

Results of operations from unconsolidated entities (in thousands):
Three Months Ended March 31,
2019
2018
Net sales
$
4,111

$
4,390

Other operating expense
(2,752
)
(3,287
)
Other income
8

63

Net income
$
1,367

$
1,166

Company’s equity in income of unconsolidated entities
$
750

$
534


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.

- 14 -


The following provides a summary of our interests in land and lot option agreements (in thousands):
March 31, 2019
December 31, 2018
Deposits
Remaining
Purchase
Price
Consolidated
Inventory
Held by VIEs
Deposits
Remaining
Purchase
Price
Consolidated
Inventory
Held by VIEs
Consolidated VIEs
$
—

$
—

$
—

$
—

$
—

$
—

Unconsolidated VIEs
49,589

390,757

N/A

41,198

433,720

N/A

Other land option agreements
25,722

271,299

N/A

30,711

307,498

N/A

Total
$
75,311

$
662,056

$
—

$
71,909

$
741,218

$
—

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 $7.0 million and $7.5 million as of March 31, 2019 and December 31, 2018 , respectively. These pre-acquisition costs are included in real estate inventories as land under development on our consolidated balance sheets.

8.
Goodwill and Other Intangible Assets
As of March 31, 2019 and December 31, 2018 , $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 March 31, 2019 , 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 in 2014, which has an indefinite useful life.
Goodwill and other intangible assets consisted of the following (in thousands):
March 31, 2019
December 31, 2018
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

(6,990
)
20,989

27,979

(6,856
)
21,123

Total
$
167,283

$
(6,990
)
$
160,293

$
167,283

$
(6,856
)
$
160,427

The remaining useful life of our amortizing intangible asset related to the Maracay trade name was 6.9 and 7.2 years as of March 31, 2019 and December 31, 2018 , respectively. The net carrying amount related to this intangible asset was $3.7 million and $3.8 million as of March 31, 2019 and December 31, 2018 , respectively. Amortization expense related to this intangible asset was $134,000 for each of the three-month periods ended March 31, 2019 and 2018 , 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 2019 , the next four years and thereafter is (in thousands):
Remainder of 2019
$
400

2020
534

2021
534

2022
534

2023
534

Thereafter
1,153

Total
$
3,689


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9.
Other Assets
Other assets consisted of the following (in thousands):
March 31, 2019
December 31, 2018
Prepaid expenses
$
30,414

$
31,983

Refundable fees and other deposits
18,071

12,376

Development rights, held for future use or sale
2,288

845

Deferred loan costs–loans payable
5,298

2,424

Operating properties and equipment, net
56,462

54,198

Lease right-of-use assets
58,088

—

Other
3,335

3,425

Total
$
173,956

$
105,251


Lease right-of-use assets was impacted by our one-time cumulative adjustment resulting from the adoption of ASC 842. As a result of our cumulative adjustment, the December 31, 2018 balance increased by $57.4 million on January 1, 2019. For further details, see Note 1, Organization, Basis of Presentation and Summary of Significant Accounting Policies.


10.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
March 31, 2019
December 31, 2018
Accrued payroll and related costs
$
17,458

$
44,010

Warranty reserves (Note 13)
70,947

71,836

Estimated cost for completion of real estate inventories
77,533

114,928

Customer deposits
21,051

17,464

Income tax liability to Weyerhaeuser
577

6,577

Accrued income taxes payable
10,853

8,335

Liability for uncertain tax positions (Note 15)
972

972

Accrued interest
24,345

12,572

Other tax liability
21,171

21,892

Lease liabilities
61,284

3,196

Other
13,600

33,367

Total
$
319,791

$
335,149


Lease liabilities was impacted by our one-time cumulative adjustment resulting from the adoption of ASC 842. As a result of our cumulative adjustment, the December 31, 2018 balance increased by $57.4 million on January 1, 2019. For further details, see Note 1, Organization, Basis of Presentation and Summary of Significant Accounting Policies.


- 16 -



11.
Senior Notes and Loans Payable
Senior Notes
The Company’s outstanding senior notes (together, the “Senior Notes”) consisted of the following (in thousands):
March 31, 2019
December 31, 2018
4.375% Senior Notes due June 15, 2019
$
381,885

$
381,895

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
(19,422
)
(21,091
)
Total
$
1,412,463

$
1,410,804

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.
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 wholly 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 of the 2019 Notes and the 2024 Notes 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 months ended March 31, 2019, we repurchased and cancelled an aggregate principal amount of $10,000 of the 2019 Notes. During the year ended December 31, 2018, we repurchased and cancelled an aggregate principal amount of $68.1 million of the 2019 Notes.
As of March 31, 2019 , there was $13.4 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 $23.3 million and $11.5 million as of March 31, 2019 and December 31, 2018 , respectively.
Loans Payable
On March 29, 2019, the Company entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”), which amended and restated the Company’s Amended and Restated Credit Agreement, dated as of July 7, 2015. The Credit Facility (as defined below), which matures on March 29, 2023, consists of a $600 million revolving credit facility (the “Revolving Facility”) and a $250 million term loan facility (the “Term Facility” and together with the Revolving Facility, the “Credit Facility”). The Term Facility includes a 90 day delayed draw provision. The Company plans to draw $250 million from the Term Facility in June of 2019 in connection with the maturity of the 2019 Notes. The Company may increase the Credit Facility to not more than $1 billion in the aggregate, at its request, upon satisfaction of specified conditions. The Revolving Facility contains a sublimit of $75 million for letters of credit. The Company may borrow under the Revolving Facility in the ordinary course of business to fund its operations, including its land acquisition, land development and homebuilding activities. Borrowings under the Revolving Facility will be governed by, among other things, a borrowing base. Interest rates on borrowings under the Revolving 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. Interest rates on borrowings under the Term Facility will be based on either a daily Eurocurrency base rate or a Eurocurrency rate, in either case, plus a spread ranging from 1.10% to 1.85% , depending on the Company’s leverage ratio.
As of March 31, 2019 , we had no outstanding debt under the Credit Facility and $818.8 million of availability after considering the borrowing base provisions and outstanding letters of credit.  As of March 31, 2019 , there was $5.3 million of capitalized debt financing costs, included in other assets on our consolidated balance sheet, related to the Credit Facility that

- 17 -


will amortize over the remaining term of the Credit Facility.  Accrued interest, including loan commitment fees, related to the Credit Facility was $432,000 and $402,000 as of March 31, 2019 and December 31, 2018 , respectively.
At March 31, 2019 and December 31, 2018 , we had outstanding letters of credit of $31.2 million and $31.8 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 March 31, 2019 and 2018 , the Company incurred interest of $23.4 million and $21.5 million , respectively, related to all debt during the period.  Included in interest incurred was amortization of deferred financing and Senior Note discount costs of $1.9 million and $2.0 million for the three months ended March 31, 2019 and 2018 , respectively. Accrued interest related to all outstanding debt at March 31, 2019 and December 31, 2018 was $24.3 million and $12.6 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 those relating to consolidated tangible net worth, leverage, liquidity or interest coverage, and a spec unit inventory test. The Credit Facility also requires that at least 97.0% of consolidated tangible net worth must be attributable to the Company and its guarantor subsidiaries, subject to certain grace periods.
The Company was in compliance with all applicable financial covenants as of March 31, 2019 and December 31, 2018 .


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
Fair Value of Financial Instruments
A summary of assets and liabilities at March 31, 2019 and December 31, 2018 , related to our financial instruments, measured at fair value on a recurring basis, is set forth below (in thousands):
March 31, 2019
December 31, 2018
Hierarchy
Book Value
Fair Value
Book Value
Fair Value
Senior Notes (1)
Level 2
$
1,425,892

$
1,395,794

$
1,425,397

$
1,308,826

__________
(1)
The book value of the Senior Notes is net of discounts, excluding deferred loan costs of $13.4 million and $14.6 million as of March 31, 2019 and December 31, 2018 , respectively. The estimated fair value of the Senior Notes at March 31, 2019 and December 31, 2018 is based on quoted market prices.

At March 31, 2019 and December 31, 2018 , the carrying value of cash and cash equivalents and receivables approximated fair value due to their short-term nature and variable interest rate terms.

- 18 -


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. No carrying values were adjusted to fair value for the three months ended March 31, 2019 or the year ended December 31, 2018.


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 reserve as of March 31, 2019 . As of December 31, 2018 , we had a $17.5 million legal reserve related to a settlement in connection with a previously disclosed lawsuit involving a land sale that occurred in 1987. This settlement was paid on February 4, 2019.
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.

- 19 -


We also record expected recoveries from insurance carriers based on actual insurance claims made and actuarially determined amounts that depend on various factors, including the above-described reserve estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Because of the inherent uncertainty and variability in these assumptions, our actual insurance recoveries could differ significantly from amounts currently estimated. Outstanding warranty insurance receivables were $37.5 million and $37.6 million as of March 31, 2019 and December 31, 2018 , respectively. Warranty insurance receivables are recorded in receivables on the accompanying consolidated balance sheets.
Warranty reserve activity consisted of the following (in thousands):
Three Months Ended March 31,
2019
2018
Warranty reserves, beginning of period
$
71,836

$
69,373

Warranty reserves accrued
4,270

4,746

Warranty expenditures
(5,159
)
(3,637
)
Warranty reserves, end of period
$
70,947

$
70,482

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 March 31, 2019 and December 31, 2018 , the Company had outstanding surety bonds totaling $653.9 million and $685.7 million , respectively. As of March 31, 2019 and December 31, 2018 , our estimated cost to complete obligations related to these surety bonds was $415.2 million and $423.4 million , respectively.
Lease Obligations
Under ASC 842 we recognize a right-of-use lease asset and a lease liability for contracts deemed to contain a lease at the inception of the contract. Our lease population is fully comprised of operating leases, which are now recorded at the net present value of future lease obligations existing at each balance sheet date. At the inception of a lease, or if a lease is subsequently modified, we determine whether the lease is an operating or financing lease. Key estimates involved with ASC 842 include the discount rate used to measure our future lease obligations and the lease term, where considerations include renewal options and intent to renew. Lease right-of-use assets are included in other assets and lease liabilities are included in accrued expenses and other liabilities on our consolidated balance sheet.
Operating Leases
We lease certain property and equipment under non-cancelable operating leases. Office leases are for terms of up to ten years and generally provide renewal options. In most cases, we expect that, in the normal course of business, leases that expire will be renewed or replaced by other leases. Equipment leases are typically for terms of three to four years.
Ground Leases
In 1987, we obtained two 55 -year ground leases of commercial property that provided for three renewal options of ten years each and one 45 -year renewal option.  We exercised the three ten year extensions on one of these ground leases extending the lease through 2071.  The commercial buildings on these properties have been sold and the ground leases have been sublet to the buyers.
For one of these leases, we are responsible for making lease payments to the land owner, and we collect sublease payments from the buyers of the buildings. This ground lease has been subleased through 2041 to the buyers of the commercial buildings. For the second lease, the buyers of the buildings are responsible for making lease payments directly to the land owner, however, we have guaranteed the performance of the buyers/lessees. See below for additional information on leases (dollars in thousands):


- 20 -


Three Months Ended March 31, 2019
Lease cost
Operating lease cost (included in SG&A expense)
$
2,044

Ground lease cost (included in other operations expense)
590

Sublease income, ground leases (included in other operations revenue)
(598
)
Net lease cost
$
2,036

Other information
Cash paid for amounts included in the measurement of lease liabilities:
Operating lease cash flows (included in operating cash flows)
$
1,609

Ground lease cash flows (included in operating cash flows)
$
608

Right-of-use assets obtained in exchange for new operating lease liabilities
$
1,707

March 31, 2019
Weighted-average discount rate:
Operating leases
6.0
%
Ground leases
10.2
%
Weighted-average remaining lease term (in years):
Operating leases
6.3

Ground leases
49.2

The future minimum lease payments under our operating leases are as follows (in thousands):
Property, Equipment and Other Leases
Ground Leases (1)
Remaining in 2019
$
6,347

$
2,238

2020
8,322

2,984

2021
7,048

2,984

2022
5,453

2,984

2023
4,349

2,984

Thereafter
8,799

84,266

$
40,318

$
98,440

(1) Ground leases are fully subleased through 2041, representing $67.4 million of the $98.4 million future ground lease obligations.




- 21 -


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 (“RSUs”) 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 March 31, 2019 , there were 5,886,605 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 March 31,
2019
2018
Total stock-based compensation
$
3,435

$
3,470

Stock-based compensation is charged to general and administrative expense on the accompanying consolidated statements of operations.  As of March 31, 2019 , total unrecognized stock-based compensation related to all stock-based awards was $29.6 million and the weighted average term over which the expense was expected to be recognized was 2.3 years .
Summary of Stock Option Activity
The following table presents a summary of stock option awards for the three months ended March 31, 2019 :
Options
Weighted
Average
Exercise
Price
Per Share
Weighted
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
(in thousands)
Options outstanding at December 31, 2018
953,905

$
14.58

4.2

$
296

Granted
—

—

—

—

Exercised
(32,486
)
$
6.50

—

—

Forfeited
—

$
—

—

—

Options outstanding at March 31, 2019
921,419

$
14.87

4.1

$
350

Options exercisable at March 31, 2019
921,419

$
14.87

4.1

$
350

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 RSUs for the three months ended March 31, 2019 :

- 22 -


Restricted
Stock
Units
Weighted
Average
Grant Date
Fair Value
Per Share
Aggregate
Intrinsic
Value
(in thousands)
Nonvested RSUs at December 31, 2018
3,341,848

$
11.05

$
36,526

Granted
1,593,747

$
12.10

—

Vested
(795,528
)
$
12.70

—

Forfeited
(745,756
)
$
5.20

—

Nonvested RSUs at March 31, 2019
3,394,311

$
12.45

$
42,904

On March 11, 2019 and February 28, 2019, the Company granted an aggregate of 3,025 and 990,723 , 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 March 11, 2019 and February 28, 2019 was measured using a price of $13.22 and $12.60 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 28, 2019, the Company granted 247,619 , 238,095 and 114,285 performance-based RSUs to the Company’s Chief Executive Officer, President, and Chief Financial Officer, respectively. These performance-based RSUs are allocated to two separate performance metrics, as follows: (i) thirty percent to total stockholder return (“TSR”), with vesting based on the Company’s TSR relative to its peer-group homebuilders; and (ii) seventy percent to 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, 2019 to December 31, 2021. The fair value of the performance-based RSUs related to the TSR metric was determined to be $8.16 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 $12.60 per share, which was the closing stock price on the date of grant. Each award will be expensed over the requisite service period.

RSUs that vested, as reflected in the table above, during the three months ended March 31, 2019 included time-based RSUs that were previously granted. RSUs that were forfeited, as reflected in the table above, during the three months ended March 31, 2019 included performance-based RSUs and time-based RSUs that were forfeited for no consideration.

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.
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.


- 23 -


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 $67.8 million as of both March 31, 2019 and December 31, 2018 .  We had a valuation allowance related to those net deferred tax assets of $3.4 million as of both March 31, 2019 and December 31, 2018 .  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 to Weyerhaeuser Company (“Weyerhaeuser”) related to a tax sharing agreement.  As of March 31, 2019 and December 31, 2018 , we had an income tax liability to Weyerhaeuser of $577,000 and $6.6 million , respectively. The income tax liability to Weyerhaeuser is recorded in accrued expenses and other liabilities on the accompanying consolidated balance sheets. During the three months ended March 31, 2019, we amended our existing tax sharing agreement with Weyerhaeuser, pursuant to which the parties agreed, among other things, that we had no further obligation to remit payment to Weyerhaeuser in connection with any potential utilization of certain deductions or losses associated with certain Weyerhaeuser entities with respect to federal and state taxes. As a result of the amendment, during the three months ended March 31, 2019, we decreased our income tax liability to Weyerhaeuser and recorded other income of $6.0 million , which is included in other income, net in the accompanying consolidated statements of operations.
Our provision for income taxes totaled $24,000 and $14.7 million for the three months ended March 31, 2019 and 2018 , respectively. The Company classifies any interest and penalties related to income taxes assessed by jurisdiction as part of income tax expense.  The Company had $1.0 million of uncertain tax positions recorded as of both March 31, 2019 and December 31, 2018 .  The Company has not been assessed interest or penalties by any major tax jurisdictions related to prior years.
16.
Related Party Transactions
We had no related party transactions for the three months ended March 31, 2019 and 2018.


- 24 -


17.
Supplemental Disclosure to Consolidated Statements of Cash Flows
The following are supplemental disclosures to the consolidated statements of cash flows (in thousands):
Three Months Ended March 31,
2019
2018
Supplemental disclosure of cash flow information:
Interest paid (capitalized), net
$
(13,697
)
$
(13,858
)
Income taxes paid (refunded), net
$
(2,538
)
$
30

Supplemental disclosures of noncash activities:
Amortization of senior note discount capitalized to real estate inventory
$
505

$
531

Amortization of deferred loan costs capitalized to real estate inventory
$
1,415

$
1,492

Increase in other assets related to adoption of ASC 606
$
—

$
39,534

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

- 25 -


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 March 31, 2019 and December 31, 2018 , condensed consolidating statements of operations for the three months ended March 31, 2019 and 2018 and condensed consolidating statement of cash flows for the three months ended March 31, 2019 and 2018 . 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):
March 31, 2019
Issuer
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
TRI Pointe
Group, Inc.
Assets
Cash and cash equivalents
$
55,854

$
92,928

$
—

$
148,782

Receivables
20,616

37,618

—

58,234

Intercompany receivables
858,286

—

(858,286
)
—

Real estate inventories
780,568

2,462,110

—

3,242,678

Investments in unconsolidated entities
—

4,191

—

4,191

Goodwill and other intangible assets, net
156,603

3,690

—

160,293

Investments in subsidiaries
1,668,464

—

(1,668,464
)
—

Deferred tax assets, net
14,822

52,939

—

67,761

Other assets
20,894

153,062

—

173,956

Total assets
$
3,576,107

$
2,806,538

$
(2,526,750
)
$
3,855,895

Liabilities
Accounts payable
$
11,973

$
54,632

$
—

$
66,605

Intercompany payables
—

858,286

(858,286
)
—

Accrued expenses and other liabilities
94,648

225,143

—

319,791

Senior notes
1,412,463

—

—

1,412,463

Total liabilities
1,519,084

1,138,061

(858,286
)
1,798,859

Equity
Total stockholders’ equity
2,057,023

1,668,464

(1,668,464
)
2,057,023

Noncontrolling interests
—

13

—

13

Total equity
2,057,023

1,668,477

(1,668,464
)
2,057,036

Total liabilities and equity
$
3,576,107

$
2,806,538

$
(2,526,750
)
$
3,855,895




- 26 -


Condensed Consolidating Balance Sheet (in thousands):
December 31, 2018
Issuer
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
TRI Pointe
Group, Inc.
Assets
Cash and cash equivalents
$
148,129

$
129,567

$
—

$
277,696

Receivables
16,589

35,003

—

51,592

Intercompany receivables
758,501

—

(758,501
)
—

Real estate inventories
812,799

2,403,260

—

3,216,059

Investments in unconsolidated entities
—

5,410

—

5,410

Goodwill and other intangible assets, net
156,604

3,823

—

160,427

Investments in subsidiaries
1,672,635

—

(1,672,635
)
—

Deferred tax assets, net
14,822

52,946

—

67,768

Other assets
12,984

92,267

—

105,251

Total assets
$
3,593,063

$
2,722,276

$
(2,431,136
)
$
3,884,203

Liabilities
Accounts payable
$
13,433

$
67,880

$
—

$
81,313

Intercompany payables
—

758,501

(758,501
)
—

Accrued expenses and other liabilities
111,902

223,247

—

335,149

Senior notes
1,410,804

—

—

1,410,804

Total liabilities
1,536,139

1,049,628

(758,501
)
1,827,266

Equity
Total stockholders’ equity
2,056,924

1,672,635

(1,672,635
)
2,056,924

Noncontrolling interests
—

13

—

13

Total equity
2,056,924

1,672,648

(1,672,635
)
2,056,937

Total liabilities and equity
$
3,593,063

$
2,722,276

$
(2,431,136
)
$
3,884,203







- 27 -


Condensed Consolidating Statement of Operations (in thousands):
Three Months Ended March 31, 2019
Issuer
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
TRI Pointe
Group, Inc.
Homebuilding:
Home sales revenue
$
171,791

$
320,912

$
—

$
492,703

Land and lot sales revenue
—

1,029

—

1,029

Other operations revenue
—

598

—

598

Total revenues
171,791

322,539

—

494,330

Cost of home sales
145,075

276,461

—

421,536

Cost of land and lot sales
—

1,495

—

1,495

Other operations expense
—

590

—

590

Sales and marketing
9,299

29,690

—

38,989

General and administrative
19,479

19,118

—

38,597

Homebuilding loss from operations
(2,062
)
(4,815
)
—

(6,877
)
Equity in loss of unconsolidated entities
—

(25
)
—

(25
)
Other income, net
6,140

101

—

6,241

Homebuilding income (loss) before income taxes
4,078

(4,739
)
—

(661
)
Financial Services:
Revenues
—

302

—

302

Expenses
—

321

—

321

Equity in income of unconsolidated entities
—

775

—

775

Financial services income before income taxes
—

756

—

756

Income (loss) before income taxes
4,078

(3,983
)
—

95

Equity of net (loss) of subsidiaries
(4,007
)
—

4,007

—

Provision for income taxes
—

(24
)
—

(24
)
Net income (loss)
$
71

$
(4,007
)
$
4,007

$
71





- 28 -


Condensed Consolidating Statement of Operations (in thousands):
Three Months Ended March 31, 2018
Issuer
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
TRI Pointe
Group, Inc.
Homebuilding:
Home sales revenue
$
190,420

$
392,152

$
—

$
582,572

Land and lot sales revenue
—

223

—

223

Other operations revenue
—

598

—

598

Total revenues
190,420

392,973

—

583,393

Cost of home sales
159,055

291,447

—

450,502

Cost of land and lot sales
—

503

—

503

Other operations expense
—

602

—

602

Sales and marketing
10,517

27,766

—

38,283

General and administrative
18,159

18,655

—

36,814

Homebuilding income from operations
2,689

54,000

—

56,689

Equity in loss of unconsolidated entities
—

(468
)
—

(468
)
Other income, net
139

32

—

171

Homebuilding income before income taxes
2,828

53,564

—

56,392

Financial Services:
Revenues
—

283

—

283

Expenses
—

137

—

137

Equity in income of unconsolidated entities
—

1,002

—

1,002

Financial services income before income taxes
—

1,148

—

1,148

Income before income taxes
2,828

54,712

—

57,540

Equity of net income of subsidiaries
40,052

—

(40,052
)
—

Provision for income taxes
—

(14,660
)
—

(14,660
)
Net income
$
42,880

$
40,052

$
(40,052
)
$
42,880











- 29 -




Condensed Consolidating Statement of Cash Flows (in thousands):
Three Months Ended March 31, 2019
Issuer
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
TRI Pointe
Group, Inc.
Cash flows from operating activities:
Net cash provided by (used in) operating activities
$
15,054

$
(129,979
)
$
—

$
(114,925
)
Cash flows from investing activities:
Purchases of property and equipment
(2,065
)
(5,159
)
—

(7,224
)
Proceeds from sale of property and equipment
—

7

—

7

Investments in unconsolidated entities
—

(231
)
—

(231
)
Intercompany
(98,723
)
—

98,723

—

Net cash (used in) provided by investing activities
(100,788
)
(5,383
)
98,723

(7,448
)
Cash flows from financing activities:
Repayment of debt
(10
)
—

—

(10
)
Debt issuance costs
(3,124
)
—

—

(3,124
)
Proceeds from issuance of common stock under
share-based awards
198

—

—

198

Minimum tax withholding paid on behalf of employees for
restricted stock units
(3,605
)
—

—

(3,605
)
Intercompany
—

98,723

(98,723
)
—

Net cash (used in) provided by financing activities
(6,541
)
98,723

(98,723
)
(6,541
)
Net decrease in cash and cash equivalents
(92,275
)
(36,639
)
—

(128,914
)
Cash and cash equivalents–beginning of period
148,129

129,567

—

277,696

Cash and cash equivalents–end of period
$
55,854

$
92,928

$
—

$
148,782





- 30 -


Condensed Consolidating Statement of Cash Flows (in thousands):
Three Months Ended March 31, 2018
Issuer
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
TRI Pointe
Group, Inc.
Cash flows from operating activities:
Net cash provided by (used in) operating activities
$
52,793

$
(2,907
)
$
—

$
49,886

Cash flows from investing activities:
Purchases of property and equipment
(419
)
(1,751
)
—

(2,170
)
Proceeds from sale of property and equipment
—

—

—

—

Investments in unconsolidated entities
—

(947
)
—

(947
)
Intercompany
(18,449
)
—

18,449

—

Net cash used in investing activities
(18,868
)
(2,698
)
18,449

(3,117
)
Cash flows from financing activities:
Distributions to noncontrolling interests
—

(1
)
—

(1
)
Proceeds from issuance of common stock under
share-based awards
975

—

—

975

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

—

(6,049
)
Intercompany
—

18,449

(18,449
)
—

Net cash (used in) provided by financing activities
(5,074
)
18,448

(18,449
)
(5,075
)
Net increase in cash and cash equivalents
28,851

12,843

—

41,694

Cash and cash equivalents–beginning of period
176,684

106,230

—

282,914

Cash and cash equivalents–end of period
$
205,535

$
119,073

$
—

$
324,608






- 31 -


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;

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•
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, 2018 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, 2018 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
We are encouraged by the economic conditions experienced in the first quarter of 2019, which resulted in a steady monthly increase in net new home orders during the quarter. We attribute this positive trend to a growing U.S. economy, aided by lower interest rates, strong unemployment metrics, and stable core inflation projected to persist through the remainder of 2019. We feel our industry has favorable long term trends due to favorable demand characteristics from both the millennial and baby boomer demographics that are buffeted by the constraints of supply, labor and the regulatory environment. We expect fiscal and monetary policy to remain favorable to our industry throughout the remainder of 2019. However, the global economy appears to be showing signs of a slowdown that could negatively impact the U.S. economy, and uncertainty in the market can act as a significant headwind to our industry. We remain optimistic as the spring selling season has moved into the second quarter.






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Consolidated Financial Data (in thousands, except per share amounts):
Three Months Ended March 31,
2019
2018
Homebuilding:


Home sales revenue
$
492,703

$
582,572

Land and lot sales revenue
1,029

223

Other operations revenue
598

598

Total revenues
494,330

583,393

Cost of home sales
421,536

450,502

Cost of land and lot sales
1,495

503

Other operations expense
590

602

Sales and marketing
38,989

38,283

General and administrative
38,597

36,814

Homebuilding (loss) income from operations
(6,877
)
56,689

Equity in loss of unconsolidated entities
(25
)
(468
)
Other income, net
6,241

171

Homebuilding (loss) income before income taxes
(661
)
56,392

Financial Services:
Revenues
302

283

Expenses
321

137

Equity in income of unconsolidated entities
775

1,002

Financial services income before income taxes
756

1,148

Income before income taxes
95

57,540

Provision for income taxes
(24
)
(14,660
)
Net income
$
71

$
42,880

Earnings per share

Basic
$
0.00

$
0.28

Diluted
$
0.00

$
0.28

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
Net New Home Orders, Average Selling Communities and Monthly Absorption Rates by Segment
Three Months Ended March 31, 2019
Three Months Ended March 31, 2018
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
161

11.8

4.5

153

13.2

3.9

5
%
(11
)%
18
%
Pardee Homes
433

44.5

3.2

473

32.5

4.9

(8
)%
37
%
(33
)%
Quadrant Homes
75

7.2

3.5

108

7.0

5.1

(31
)%
3
%
(32
)%
Trendmaker Homes
243

39.3

2.1

155

29.8

1.7

57
%
32
%
19
%
TRI Pointe Homes
295

30.8

3.2

459

33.8

4.5

(36
)%
(9
)%
(29
)%
Winchester Homes
114

14.2

2.7

148

13.5

3.7

(23
)%
5
%
(27
)%
Total
1,321

147.8

3.0

1,496

129.8

3.8

(12
)%
14
%
(22
)%

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Net new home orders for the three months ended March 31, 2019 decreased by 175 orders, or 12%, to 1,321 , compared to 1,496 during the prior-year period.  The decrease in net new home orders was due to a 22% decrease in monthly absorption rate, offset by a 14% increase in average selling communities. The overall decrease in our monthly absorption rate was primarily due to reduced sales in January 2019, as well as our exceptionally strong sales numbers in the first quarter of 2018. Our monthly net new home order rate increased sequentially during the current year period. The increase in average selling communities was due primarily to our acquisition of a Dallas–Fort Worth-based homebuilder in December 2018.
Maracay reported a 5% increase in net new home orders driven by an 18% increase in monthly absorption rate offset by an 11% decrease in average selling communities. The increase in Maracay’s monthly absorption rate to 4.5 for the three months ended March 31, 2019 was driven by strong demand for Maracay’s new community openings during the quarter as well as continued strong market fundamentals. The decrease in average selling communities from the prior-year period was due to the timing of community openings and closings. Pardee Homes reported an 8% decrease in net new home orders driven by a 33% decrease in monthly absorption rate, offset by a 37% increase in average selling communities. Pardee Homes’ monthly absorption rate remained strong at 3.2 homes per community per month, but decreased from a robust 4.9 in the prior-year period. The increase in average selling communities was a result of increased community count in the Los Angeles, Inland Empire and San Diego markets. Net new home orders decreased 31% at Quadrant Homes due to a 32% decrease in monthly absorption rate during the current-year period as compared to the prior-year period. Quadrant Homes’ monthly absorption rate of 3.5 for the three months ended March 31, 2019 was consistent with seasonal expectations but represented a decrease compared to the substantially strong absorptions in the prior-year period. Trendmaker Homes’ net new home orders increased 57% due to a 32% increase in average selling communities and a 19% increase in monthly absorption rate. The increase in average selling communities was largely the result of the acquisition of a Dallas–Fort Worth-based homebuilder in the fourth quarter of 2018. During the three months ended March 31, 2019, Trendmaker Homes’ reported 85 net new home orders from 13.8 average selling communities in Dallas–Fort Worth. The increase in Trendmaker Homes’ monthly absorption rate was due to both the addition of our Dallas–Fort Worth operations as well as a slight improvement in the monthly absorption rate in Houston. TRI Pointe Homes’ net new home orders decreased 36% due to a 29% decrease in its monthly absorption rate and a 9% decrease in average selling communities. The decrease in TRI Pointe Homes’ monthly absorption rate was due both to the unfavorable 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 and Southern California communities. Winchester Homes reported a 23% decrease in net new home orders as a result of a 27% decrease in our monthly absorption rate, offset by a 5% increase in average selling communities. The decrease in Winchester Homes’ monthly absorption rate was due to slower overall market conditions.
Backlog Units, Dollar Value and Average Sales Price by Segment (dollars in thousands)
As of March 31, 2019
As of March 31, 2018
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
238

$
139,862

$
588

245

$
123,617

$
505

(3
)%
13
%
16
%
Pardee Homes
593

472,729

797

608

408,324

672

(2
)%
16
%
19
%
Quadrant Homes
77

75,599

982

169

138,025

817

(54
)%
(45
)%
20
%
Trendmaker Homes
402

196,256

488

244

134,632

552

65
%
46
%
(12
)%
TRI Pointe Homes
371

247,399

667

667

474,240

711

(44
)%
(48
)%
(6
)%
Winchester Homes
161

105,993

658

210

130,204

620

(23
)%
(19
)%
6
%
Total
1,842

$
1,237,838

$
672

2,143

$
1,409,042

$
658

(14
)%
(12
)%
2
%
Backlog units reflect the number of homes, net of actual cancellations experienced during the period, for which we have entered into a sales contract with a homebuyer but for which we have not yet delivered the home. Homes in backlog are generally delivered within three to nine months, 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 15% compared to 14% during the prior-year period. The dollar value of backlog was $1.2 billion as of March 31, 2019, a decrease of $171.2 million, or 12%, compared to $1.4 billion as of March 31, 2018.  This decrease was due to a decrease in backlog units of 301, or 14%, to 1,842 as of March 31, 2019, compared to 2,143 as of March 31, 2018, offset by a 2% increase in the average sales price of homes in backlog to $672,000 as of March 31, 2019, compared to $658,000 as of March 31, 2018.

- 35 -


Maracay’s backlog dollar value increased 13% compared to the prior-year period largely due to a 16% increase in average sales price. The increase in average sales price was due to product mix and increasing prices due to favorable overall market conditions. Pardee Homes’ backlog dollar value increased 16% due to an increase in average sales price of 19%. The increase in average sales price is due to a higher priced mix of homes in backlog in both the San Diego and Las Vegas markets. Quadrant Homes’ backlog dollar value decreased 45% as a result of a 54% decrease in backlog units offset by a 20% increase in average sales price. The decrease in backlog units was a result of the decrease in net new home orders resulting from generally slower year over year market conditions in the Seattle area. The increase in average sales price was related to an increase in the number of homes in backlog from the core Seattle markets of King and Snohomish counties, which tend to have higher price points. Trendmaker Homes’ backlog dollar value increased 46% primarily due to an 65% increase in backlog units. The increase in backlog units resulted primarily from our expansion into Dallas–Fort Worth where we had 167 homes in backlog as of March 31, 2019. TRI Pointe Homes’ backlog dollar value decreased 48% due to a 44% decrease in backlog units and a 6% decrease in average sales price. The decrease in backlog units was due to a decrease in net new home orders in Northern and Southern California as a result of lower demand compared to the prior-year period. Winchester Homes’ backlog dollar value decreased 19% due to a 23% decrease in backlog units offset by a 6% increase in average sales price. The decrease in backlog units is a result of the 23% decrease in net new home orders for the three months ended March 31, 2019 as well as the reduced number of units in backlog as of the beginning of the current-year period as compared to the prior-year period.
New Homes Delivered, Homes Sales Revenue and Average Sales Price by Segment (dollars in thousands)
Three Months Ended March 31, 2019
Three Months Ended March 31, 2018
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
74

$
39,561

$
535

125

$
58,455

$
468

(41
)%
(32
)%
14
%
Pardee Homes
242

134,863

557

274

180,470

659

(12
)%
(25
)%
(15
)%
Quadrant Homes
44

43,273

983

83

61,305

739

(47
)%
(29
)%
33
%
Trendmaker Homes
154

70,120

455

84

41,185

490

83
%
70
%
(7
)%
TRI Pointe Homes
242

171,791

710

269

190,420

708

(10
)%
(10
)%
—
%
Winchester Homes
58

33,095

571

89

50,737

570

(35
)%
(35
)%
—
%
Total
814

$
492,703

$
605

924

$
582,572

$
630

(12
)%
(15
)%
(4
)%
Home sales revenue decreased $89.9 million, or 15%, to $492.7 million for the three months ended March 31, 2019. The decrease was comprised of (i) $69.4 million related to a decrease of 110 new homes delivered in the three months ended March 31, 2019 compared to the prior-year period, and (ii) $20.5 million related to a decrease of $25,000 in average sales price of homes delivered in the three months ended March 31, 2019 compared to the prior-year period.
Maracay had a 32% decrease in home sales revenue due primarily to a 41% decrease in new homes delivered. The decrease in new home deliveries was due to the decrease in backlog units at the start of the current-year period compared to the prior-year period. Pardee Homes’ home sales revenue decreased 25% due to a 15% decrease in average sales price and a 12% decrease in new homes delivered. The decrease in average sales price was due to a product mix shift that included a lesser proportion of deliveries from our higher priced long-dated California assets in the current-year period. Quadrant Homes’ home sales revenue decreased by 29% due to a 47% decrease in new homes delivered, offset by a 33% increase in average sales price. 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 tend to have higher price points. Trendmaker Homes’ home sales revenue increased 70% due to an 83% increase in new homes delivered. The increase in new homes delivered was largely due to 53 deliveries from our Dallas–Fort Worth operations, along with higher volume in the Austin market. TRI Pointe Homes had a 10% decrease in home sales revenue due to a 10% decrease in new homes delivered. The decrease in new homes delivered was driven by lower backlog units at the start of the current-year period compared to the prior-year period. Home sales revenue decreased at Winchester Homes by 35% due to a 35% decrease in new homes delivered as a result of lower backlog units at the start of the current-year period compared to the prior-year period.

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Homebuilding Gross Margins (dollars in thousands)
Three Months Ended March 31,
2019
%
2018
%
Home sales revenue
$
492,703

100.0
%
$
582,572

100.0
%
Cost of home sales
421,536

85.6
%
450,502

77.3
%
Homebuilding gross margin
71,167

14.4
%
132,070

22.7
%
Add:  interest in cost of home sales
14,191

2.9
%
14,229

2.4
%
Add:  impairments and lot option abandonments
5,202

1.1
%
248

0.0
%
Adjusted homebuilding gross margin (1)
$
90,560

18.4
%
$
146,547

25.2
%
Homebuilding gross margin percentage
14.4
%
22.7
%
Adjusted homebuilding gross margin percentage (1)
18.4
%
25.2
%
__________
(1)
Non-GAAP financial measure (as discussed below).
Our homebuilding gross margin percentage decreased to 14.4% for the three months ended March 31, 2019 as compared to 22.7% for the prior-year period.  The decrease in gross margin percentage was due to an increase in lot option abandonments, as well as lower revenue from some of our long-dated California communities, which produce gross margins above the Company average. In addition, we increased incentives in the fourth quarter of 2018 to sell inventory homes, which impacted gross margin percentage upon delivery of those homes during the first quarter of 2019, as well as purchase accounting adjustments related to the acquisition of a Dallas-Fort Worth based building in the fourth quarter of 2018. Excluding interest and impairment and lot option abandonments in cost of home sales, adjusted homebuilding gross margin percentage was 18.4% for the three months ended March 31, 2019 , compared to 25.2% 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 March 31,
As a Percentage of
Home Sales Revenue
2019
2018
2019
2018
Sales and marketing
$
38,989

$
38,283

7.9
%
6.6
%
General and administrative (G&A)
38,597

36,814

7.8
%
6.3
%
Total sales and marketing and G&A
$
77,586

$
75,097

15.7
%
12.9
%
Total sales and marketing and general and administrative (“SG&A”) as a percentage of home sales revenue increased to 15.7% for the three months ended March 31, 2019 , compared to 12.9% in the prior-year period. Total SG&A expense increased $2.5 million to $77.6 million for the three months ended March 31, 2019 from $75.1 million in the prior-year period.
Sales and marketing expense as a percentage of home sales revenue increased to 7.9% for the three months ended March 31, 2019 , compared to 6.6% for the prior-year period. The increase was due primarily to advertising costs associated with the timing of current and future community openings. In addition, our ending community count increased from 131 as of March 31, 2018 to 146 as of March 31, 2019, resulting in higher fixed sales and marketing costs on a year over year basis. Sales and marketing expense increased to $39.0 million for the three months ended March 31, 2019 compared to $38.3 million in the prior-year period due to the higher fixed cost associated with a higher community count.
General and administrative (“G&A”) expense as a percentage of home sales revenue increased to 7.8% of home sales revenue for the three months ended March 31, 2019 compared to 6.3% for the prior-year period as a result of lower operating leverage due to the 15% decrease in home sales revenue.  G&A expense increased to $38.6 million for the three months ended

- 37 -


March 31, 2019 compared to $36.8 million for the prior-year period primarily as a result of additional headcount to support future growth in our new and existing markets, including our organic expansion into the Carolinas in October 2018 and our acquisition of a Dallas–Fort Worth based homebuilder in December 2018.
Interest
Interest, which we incurred principally to finance land acquisitions, land development and home construction, totaled $23.4 million and $21.5 million for the three months ended March 31, 2019 and 2018 , respectively.  All interest incurred in both periods was capitalized.
Other Income, Net
Other income, net for the three months ended March 31, 2019 and 2018 was $6.2 million and $0.2 million, respectively. During the three months ended March 31, 2019, we amended our existing tax sharing agreement with Weyerhaeuser Company (“Weyerhaeuser”), pursuant to which the parties agreed, among other things, that we had no further obligation to remit payment to Weyerhaeuser in connection with any potential utilization of certain deductions or losses associated with certain Weyerhaeuser entities with respect to federal and state taxes. As a result of the amendment, during the three months ended March 31, 2019, we recorded other income of $6.0 million related to the reduction of our income tax liability to Weyerhaeuser.
Income Tax
For the three months ended March 31, 2019 , we recorded a tax provision of $24,000 based on an effective tax rate of 25.3% .  For the three months ended March 31, 2018 , we recorded a tax provision of $ 14.7 million based on an effective tax rate of 25.5% . The decrease in provision for income taxes is due to a $57.4 million decrease in income before income taxes to $95,000 for the three months ended March 31, 2019 , compared to $57.5 million for the prior-year period.
Financial Services Segment
Income from our financial services operations decreased to $756,000 for the three months ended March 31, 2019 compared to $1.1 million for the prior-year period.  The decrease in financial services income for the three months ended March 31, 2019 compared to the prior-year period relates to the 12% decrease in new homes delivered, which resulted in fewer opportunities to capture financial services income.

- 38 -


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:
March 31,
Increase
(Decrease)
2019
2018
Amount
%
Lots Owned
Maracay
2,272

1,825

447

24
%
Pardee Homes
13,523

14,814

(1,291
)
(9
)%
Quadrant Homes
854

1,148

(294
)
(26
)%
Trendmaker Homes
1,787

1,503

284

19
%
TRI Pointe Homes
2,914

2,845

69

2
%
Winchester Homes
1,291

1,555

(264
)
(17
)%
Total
22,641

23,690

(1,049
)
(4
)%
Lots Controlled (1)
Maracay
738

1,176

(438
)
(37
)%
Pardee Homes
731

799

(68
)
(9
)%
Quadrant Homes
694

625

69

11
%
Trendmaker Homes
611

429

182

42
%
TRI Pointe Homes
927

872

55

6
%
Winchester Homes
359

600

(241
)
(40
)%
Total
4,060

4,501

(441
)
(10
)%
Total Lots Owned or Controlled (1)
26,701

28,191

(1,490
)
(5
)%
__________
(1)
As of March 31, 2019 and 2018 , 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 three months ended March 31, 2019 were operating expenses, land purchases, land development and home construction. We used funds generated by our operations to meet our short-term working capital requirements. We monitor financing requirements to evaluate potential financing sources, including bank credit facilities and note offerings. 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 March 31, 2019 , we had total liquidity of $967.6 million , including cash and cash equivalents of $148.8 million and $818.8 million of availability under our Credit Facility, as described below, 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 $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.
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.

- 39 -


TRI Pointe Group and its wholly 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 of the 2019 Notes and 2024 Notes 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 months ended March 31, 2019, we repurchased and cancelled an aggregate principal amount of $10,000 of the 2019 Notes. During the year ended December 31, 2018, we repurchased and cancelled an aggregate principal amount of $68.1 million of the 2019 Notes. As of March 31, 2019 the principal amount outstanding under the 2019 Notes was $381.9 million .
Our outstanding senior notes (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. As of March 31, 2019, we were in compliance with the covenants required by our Senior Notes.
Loans Payable
On March 29, 2019, we entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”), which amended and restated our Amended and Restated Credit Agreement, dated as of July 7, 2015. The Credit Facility (as defined below), which matures on March 29, 2023, consists of a $600 million revolving credit facility (the “Revolving Facility”) and a $250 million term loan facility (the “Term Facility” and together with the Revolving Facility, the Credit Facility”). The Term Facility includes a 90 day delayed draw provision. The Company plans to draw $250 million from the Term Facility in June of 2019 in connection with the maturity of the 2019 Notes. The Company may increase the Credit Facility to not more than $1 billion in the aggregate, at its request, upon satisfaction of specified conditions. The Revolving Facility contains a sublimit of $75 million for letters of credit. The Company may borrow under the Revolving Facility in the ordinary course of business to fund its operations, including its land acquisition, land development and homebuilding activities. Borrowings under the Revolving Facility will be governed by, among other things, a borrowing base. Interest rates on borrowings under the Revolving 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. Interest rates on borrowings under the Term Facility will be based on either a daily Eurocurrency base rate or a Eurocurrency rate, in either case, plus a spread ranging from 1.10% to 1.85% , depending on the Company’s leverage ratio.
As of March 31, 2019 , we had no outstanding debt under the Credit Facility and $818.8 million of availability after considering the borrowing base provisions and outstanding letters of credit.  At March 31, 2019 we had outstanding letters of credit of $31.2 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
March 31,
Covenant
Requirement at
March 31,
Financial Covenants
2019
2019
Consolidated Tangible Net Worth
$
1,896,730

$
1,350,036

(Not less than $1.35 billion plus 50% of net income and
50% of the net proceeds from equity offerings after
December 31, 2018)

Leverage Test
40.5
%
≤55%

(Not to exceed 55%)

Interest Coverage Test
4.9

≥1.5

(Not less than 1.5:1.0)

In addition, the Credit Facility limits the aggregate number of single family dwellings (where construction has commenced) owned by the Company or any guarantor that are not presold or model units to no more than the greater of (i) 50% of the number of housing unit closings (as defined) during the preceding 12 months; or (ii) 100% of the number of housing unit closings during the preceding 6 months. However, a failure to comply with this “Spec Unit Inventory Test” will not be an event of default or default, but will be excluded from the borrowing base as of the last day of the quarter in which the non-

- 40 -


compliance occurs. The Credit Facility further requires that at least 97.0% of consolidated tangible net worth must be attributable to the Company and its guarantor subsidiaries, subject to certain grace periods.
As of March 31, 2019 , we were in compliance with all of these financial covenants.
Stock Repurchase Program
On February 21, 2019, our board of directors discontinued and cancelled the 2018 Repurchase Program and approved the 2019 Repurchase Program, authorizing the repurchase of shares of common stock with an aggregate value of up to $100 million through March 31, 2020. Purchases of common stock pursuant to the 2019 Repurchase Program may be made in open market transactions effected through a broker-dealer at prevailing market prices, in block trades, or by other means in accordance with federal securities laws, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 under the Exchange Act. We are not obligated under the 2019 Repurchase Program to repurchase any specific number or dollar amount of shares of common stock, and we may modify, suspend or discontinue the 2019 Repurchase Program at any time. Our management will determine the timing and amount of repurchase in its discretion based on a variety of factors, such as the market price of our common stock, corporate requirements, general market economic conditions and legal requirements. Through the date of the filing of this Quarterly Report on Form 10-Q, no shares of common stock have been repurchased under the 2019 Repurchase Program.
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):
March 31, 2019
December 31, 2018
Senior Notes
$
1,412,463

$
1,410,804

Total debt
1,412,463

1,410,804

Stockholders’ equity
2,057,023

2,056,924

Total capital
$
3,469,486

$
3,467,728

Ratio of debt-to-capital (1)
40.7
%
40.7
%
Total debt
$
1,412,463

$
1,410,804

Less: Cash and cash equivalents
(148,782
)
(277,696
)
Net debt
1,263,681

1,133,108

Stockholders’ equity
2,057,023

2,056,924

Net capital
$
3,320,704

$
3,190,032

Ratio of net debt-to-net capital (2)
38.1
%
35.5
%
__________
(1)
The ratio of debt-to-capital is computed as the quotient obtained by dividing total debt by the sum of total debt plus stockholders’ equity.
(2)
The ratio of net debt-to-net capital is a non-GAAP financial measure and is computed as the quotient obtained by dividing net debt (which is total debt less cash and cash equivalents) by the sum of net debt plus stockholders’ equity. The most directly comparable GAAP financial measure is the ratio of debt-to-capital. We believe the ratio of net debt-to-net capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing. See the table above reconciling this non-GAAP financial measure to the ratio of debt-to-capital.  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.

- 41 -


Cash Flows— Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
For the three months ended March 31, 2019 as compared to the three months ended March 31, 2018 , the comparison of cash flows is as follows:
•
Net cash used in operating activities increased by $164.8 million to $114.9 million for the three months ended March 31, 2019 , from net cash provided of $49.9 million for the three months ended March 31, 2018 . The change was comprised of offsetting activity, including (i) a decrease in net income to $71,000 for the three months ended March 31, 2019 compared to $42.9 million in the prior-year period, (ii) a decrease in cash collected to cash used of $6.6 million in the three months ended March 31, 2019 compared to cash provided of $70.4 million in the prior-year period, and (iii) other offsetting activity, including changes in inventory, other assets, accounts payable and accrued expenses.
•
Net cash used in investing activities was $7.4 million for the three months ended March 31, 2019 , compared to $3.1 million for the prior-year period.  The increase in cash used in investing activities was due mainly to increased purchases of property and equipment.
•
Net cash used in financing activities was $6.5 million for the three months ending March 31, 2019 , compared to net cash provided by financing activities of $5.1 million for the same period 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 March 31, 2019 , we had $75.3 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 $662.1 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 March 31, 2019 , we had total liquidity of $967.6 million , including cash of $148.8 million and $818.8 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.

- 42 -


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
The following table presents project information relating to each of our markets as of March 31, 2019 and includes information on current projects under development where we are building and selling homes.

- 43 -


Maracay
County, Project, City
Year of
First
Delivery (1)
Total
Number of
Lots (2)
Cumulative
Homes
Delivered
as of
March 31,
2019
Lots
Owned as of
March 31, 2019 (3)
Backlog as of
March 31,
2019 (4)(5)
Homes
Delivered
for the Three
Months Ended
March 31,
2019
Sales Price
Range
(in thousands) (6)
Phoenix, Arizona
City of Buckeye:
Verrado Victory
2015
98

85

13

7

5

$373 - $405
Arroyo Seco
2020
44

—

44

—

—

$406 - $458
City of Chandler:
Hawthorn Manor
2017
84

66

18

14

7

$490 - $564
Mission Estates
2019
26

—

26

7

—

$530 - $590
Windermere Ranch
2019
91

—

91

7

—

$499 - $539
City of Gilbert:
Marathon Ranch
2018
63

19

44

27

10

$515 - $558
Lakes At Annecy
2019
216

—

216

5

—

$250 - $350
Annecy P3
2020
250

—

250

—

—

$226 - $301
Lakeview Trails
2019
92

—

92

38

—

$528 - $603
Copper Bend
2020
38

—

38

—

—

$451 - $484
Hamstra Assemblage
2020
332

—

332

—

—

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

24

93

9

6

$190 - $220
Cottages at Rio Paseo
2018
93

38

55

12

7

$231 - $251
City of Mesa:
The Vista at Granite Crossing
2018
37

31

6

6

6

$438 - $513
Electron at Eastmark
2019
53

—

53

20

—

$361 - $438
City of Peoria:
Legacy at The Meadows
2017
74

68

6

—

2

$425 - $451
Estates at The Meadows
2017
272

114

158

46

14

$499 - $576
Enclave at The Meadows
2018
126

32

94

21

3

$375 - $470
Deseo
2019
94

—

94

—

—

$501 - $583
City of Phoenix:
Navarro Groves
2018
54

31

23

18

7

$439 - $484
Loma at Avance
2019
124

—

124

—

—

$352 - $412
Ranger at Avance
2019
143

—

143

—

—

$398 - $466
Piedmont at Avance
2019
101

—

101

—

—

$475 - $495
Alta at Avance
2019
26

—

26

—

—

$595 - $625
Town of Queen Creek:
Spur Cross
2020
118

—

118

—

—

$454 - $544
Closed Communities
N/A
—

—

—

—

—

Phoenix, Arizona Total
2,766

508

2,258

237

67

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

90

13

1

3

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

83

—

—

1

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

88

—

—

3

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

68

1

—

—

$448 - $480
Tucson, Arizona Total
343

329

14

1

7

Maracay Total
3,109

837

2,272

238

74



- 44 -


Pardee Homes
County, Project, City
Year of
First
Delivery (1)
Total
Number of
Lots (2)
Cumulative
Homes
Delivered
as of
March 31,
2019
Lots
Owned as of
March 31, 2019 (3)
Backlog as of
March 31,
2019 (4)(5)
Homes
Delivered
for the Three
Months Ended
March 31,
2019
Sales Price
Range
(in thousands) (6)
California
San Diego County:
Almeria
2017
80

80

—

—

5

$1,440 - $1,560
Vista Santa Fe
2019
44

—

44

8

—

$1,760 - $1,900
Sendero
2019
112

—

112

56

—

$1,150 - $1,300
Terraza
2019
81

—

81

30

—

$1,260 - $1,370
Carmel
2019
105

—

105

27

—

$1,380 - $1,490
Vista Del Mar
2019
79

—

79

22

—

$1,530 - $1,720
Pacific Highlands Ranch Future
2020
115

—

115

—

—

$1,800 - $1,900
Sandstone
2018
81

63

18

10

14

$640 - $710
Lake Ridge
2018
129

50

79

13

16

$710 - $860
Veraz
2018
111

15

96

3

5

$380 - $460
Moderna
2018
44

18

26

6

8

$355 - $440
Marea
2020
135

—

135

—

—

$370 - $470
Solmar
2019
74

—

74

—

—

$365 - $440
Solmar Sur
2019
108

—

108

—

—

$365 - $440
Meadowood
TBD
845

—

845

—

—

$290 - $590
South Otay Mesa
TBD
893

—

893

—

—

TBD
Los Angeles County:
Verano
2017
95

45

50

4

8

$565 - $670
Arista
2017
143

75

68

3

7

$700 - $785
Cresta
2018
67

14

53

10

4

$790 - $890
Lyra
2019
84

—

84

10

—

$648 - $720
Sola
2019
73

—

73

34

—

$545 - $590
Skyline Ranch Future
TBD
913

—

913

—

—

$550 - $810
Riverside County:
Vantage
2016
101

100

1

—

1

$390 - $410
Aura
2017
100

100

—

—

3

$370 - $385
Starling
2017
68

49

19

4

9

$425 - $430
Canyon Hills Future 70 x 115
TBD
125

—

125

—

—

TBD
Westlake
2020
163

—

163

—

—

$318 - $325
Elara
2016
260

213

47

14

11

$300 - $330
Daybreak
2017
159

83

76

5

9

$360 - $385
Cascade
2017
209

118

91

8

18

$325 - $340
Abrio
2018
98

37

61

11

5

$400 - $420
Beacon
2018
106

27

79

21

9

$465 - $520
Alisio
2019
84

—

84

28

—

$300 - $330
Vita
2019
111

—

111

17

—

$310 - $335
Avid
2019
72

—

72

14

—

$340 - $365
Elan
2019
101

—

101

6

—

$410 - $440
Mira
2019
90

—

90

5

—

$375 - $400
Sundance Future Active Adult
TBD
330

—

330

—

—

TBD
Avena
2018
84

32

52

8

7

$450 - $475
Tamarack
2018
84

57

27

6

2

$470 - $520
Braeburn
2018
82

14

68

8

6

$420 - $450
Canvas
2018
89

12

77

12

4

$400 - $425
Kadence
2018
85

10

75

7

2

$420 - $440
Newpark
2018
93

11

82

9

3

$450 - $495
Easton
2018
92

7

85

8

2

$475 - $530
Tournament Hills Future
TBD
268

—

268

—

—

TBD
Banning
2020
4,344

—

4,344

—

—

TBD
San Joaquin County:

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Bear Creek
TBD
1,252

—

1,252

—

—

TBD
Closed Communities
—

—

—

—

—

California Total
13,061

1,230

11,831

427

158

Nevada
Clark County:
North Peak
2015
176

176

—

—

1

$312 - $370
Castle Rock
2015
183

181

2

2

2

$365 - $455
Escala
2016
64

64

—

—

1

$520 - $590
Strada
2017
140

59

81

7

—

$425 - $480
Linea
2018
123

58

65

33

10

$360 - $400
Strada 2.0
2019
35

—

35

—

—

$425 - $480
Linea II
2020
79

—

79

—

—

$360 - $400
Inspirada Townhomes
2020
114

—

114

—

—

TBD
Meridian
2016
62

62

—

—

1

$595 - $690
Pebble Estate Future
TBD
8

—

8

—

—

TBD
Encanto
2016
51

50

1

—

1

$475 - $530
Luma
2018
63

49

14

10

8

$490 - $530
Evolve
2019
74

—

74

—

—

$300
Corterra
2018
112

10

102

6

7

$465 - $550
Keystone
2017
70

66

4

2

3

$465 - $550
Cobalt
2017
124

51

73

8

5

$380 - $455
Onyx
2018
71

15

56

14

1

$450 - $485
Axis
2017
52

36

16

11

3

$860 - $1,125
Axis at the Canyons
2019
26

—

26

2

—

$875 - $905
Midnight Ridge
2019
104

—

104

—

—

$540 - $585
Pivot
2017
88

54

34

11

10

$405 - $470
Strada at Pivot
2017
27

26

1

1

1

$450 - $480
Nova Ridge
2017
108

44

64

20

5

$680 - $840
Tera Luna
2018
116

9

107

6

5

$545 - $660
Indogo
2018
202

32

170

10

10

$315 - $360
Larimar
2018
170

8

162

5

4

$380 - $420
Blackstone
2018
140

11

129

18

6

$405 - $500
Cirrus
2019
54

—

54

—

—

$350 - $375
Sandalwood
2020
117

—

117

—

—

$685 - $815
Nevada Total
2,753

1,061

1,692

166

84

Pardee Total
15,814

2,291

13,523

593

242



- 46 -


Quadrant Homes
County, Project, City
Year of
First
Delivery (1)
Total
Number of
Lots (2)
Cumulative
Homes
Delivered
as of
March 31,
2019
Lots
Owned as of
March 31, 2019 (3)
Backlog as of
March 31,
2019 (4)(5)
Homes
Delivered
for the Three
Months Ended
March 31,
2019
Sales Price
Range
(in thousands) (6)
Washington
Snohomish County:
Grove North, Bothell
2019
43

—

43

—

—

$765 - $900
Grove South, Bothell
2019
9

—

9

—

—

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

—

82

—

—

$700 - $900
Inglewood Landing, Sammamish
2019
21

1

20

9

1

$1,115 - $1,295
Kirkwood Terrace, Sammamish
2018
12

8

4

2

3

$1,800 - $1,900
English Landing P1, Redmond
2018
50

44

6

5

7

$1,245
Cedar Landing, North Bend
2019
138

—

138

14

—

$740 - $880
Monarch Ridge, Sammamish
2019
59

—

59

—

—

$970 - $1,135
Overlook at Summit Park, Maple Valley
2019
126

1

125

13

1

$590 - $700
Ray Meadows, Redmond
2018
27

14

13

12

4

$1,065
Aurea, Sammamish
2019
41

—

41

—

—

$710 - $860
Aldea, Newcastle
2019
129

11

118

8

11

$695 - $925
Lario, Bellevue
2019
46

—

46

—

—

$795 - $1,125
Soundview, Federal Way
2018
21

4

17

6

—

$531 - $660
Eagles Glen, Sammamish
2020
10

—

10

—

—

$1,100 - $2,000
Finn Meadows, Kirkland
2020
5

—

5

—

—

$900 - $1,049
Pierce County:
Harbor Hill S-5/6, Gig Harbor
2017
72

69

3

3

6

$493
Kitsap County:
Lone Pine, Poulsbo
2019
15

—

15

—

—

$473 - $530
Winslow Grove, Bainbridge Island
2018
19

4

15

5

2

$1,042 - $1,142
Blue Heron, Poulsbo
2021
85

—

85

—

—

$474 - $649
Closed Communities
—

—

—

—

9

Washington Total
1,010

156

854

77

44

Quadrant Total
1,010

156

854

77

44







- 47 -


Trendmaker Homes
County, Project, City
Year of
First
Delivery (1)
Total
Number of
Lots (2)
Cumulative
Homes
Delivered
as of
March 31,
2019
Lots
Owned as of
March 31, 2019 (3)
Backlog as of
March 31,
2019 (4)(5)
Homes
Delivered
for the Three
Months Ended
March 31,
2019
Sales Price
Range
(in thousands) (6)
Texas
Brazoria County:
Pomona, Manvel
2015
49

37

12

3

2

$422 - $489
Rise Meridiana
2016
47

31

16

1

1

$292 - $373
Fort Bend County:
Cross Creek Ranch 60', Fulshear
2013
48

31

17

6

—

$399 - $500
Cross Creek Ranch 65', Fulshear
2013
89

71

18

7

7

$442 - $557
Cross Creek Ranch 70', Fulshear
2013
72

50

22

11

4

$510 - $609
Cross Creek Ranch 80', Fulshear
2013
54

30

24

16

3

$600 - $655
Cross Creek Ranch 90', Fulshear
2013
37

33

4

1

1

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

33

21

11

2

$573 - $679
Harvest Green 75', Richmond
2015
44

37

7

4

2

$446 - $543
Sienna Plantation 85', Missouri City
2015
54

32

22

1

2

$546 - $661
Grayson Woods 60'
TBD
10

—

10

—

—

TBD
Grayson Woods 70'
TBD
8

—

8

—

—

TBD
Harris County:
The Groves, Humble
2015
117

77

40

5

6

$483 - $511
Lakes of Creekside
2015
38

17

21

7

1

$534 - $611
Balmoral 50'
2019
24

—

24

—

—

TBD
Bridgeland '80, Cypress
2015
147

127

20

5

2

$549 - $708
Bridgeland 70'
2018
41

8

33

5

1

$511 - $574
Villas at Bridgeland 50'
2018
48

4

44

2

2

$370 - $409
Elyson 70', Cypress
2016
20

18

2

2

—

$463 - $482
Falls at Dry Creek
2019
1

—

1

—

—

TBD
Clear Lake, Houston
2015
778

491

287

52

18

$395 - $717
Montgomery County:
Northgrove, Tomball
2015
25

7

18

—

—

TBD
Bender's Landing Estates, Spring
2014
104

95

9

5

4

$553 - $596
The Woodlands, Creekside Park
2015
126

88

38

13

14

$423 - $699
Royal Brook, Porter
2019
25

—

25

2

—

$386 - $479
Waller County:
LakeHouse
TBD
350

—

350

—

—

$260 - $575
Williamson County:
Crystal Falls
2016
29

25

4

—

—

TBD
Rancho Sienna 60'
2016
51

22

29

4

4

$335 - $420
Rancho Sienna 80'
2018
5

2

3

3

—

$456 - $519
Highlands at Mayfield Ranch 50'
2018
36

12

24

8

4

$280 - $330
Highlands at Mayfield Ranch 60'
2018
23

5

18

4

4

$340 - $407
Rancho Sienna 50'
2019
30

—

30

2

—

$330 - $372
Palmera Ridge
2019
30

—

30

12

—

$270 - $326
Hays County:
Belterra 60', Austin
2017
36

32

4

4

6

$445 - $489
Belterra 80', Austin
2016
37

35

2

1

1

$600
Headwaters, Dripping Springs
2017
30

26

4

4

3

$453 - $485
6 Creeks 50' Section 1 & 2
2019
35

—

35

—

—

TBD
6 Creeks 60' Section 1 & 2
2019
15

—

15

—

—

TBD
Travis County:
Lakes Edge 70'
2018
45

17

28

27

4

$645 - $830
Lakes Edge 80'
2018
14

5

9

7

1

$742 - $792
Collin County:
Miramonte, Frisco
2016
62

40

22

8

4

$475 - $560
Retreat at Craig Ranch, McKinney
2012
165

145

20

4

2

$375 - $415

- 48 -


Dallas County:
Vineyards, Rowlett
2017
34

15

19

6

3

$368 - $480
Denton County:
Glenview, Frisco
2017
50

13

37

7

5

$345 - $485
Paloma Creek, Little Elm
2015
267

151

116

16

7

$275 - $390
Parks at Legacy, Prosper
2017
49

18

31

8

4

$384 - $495
Shadow Creek, Hickory Creek
2016
40

38

2

1

2

$360 - $400
Valencia, Little Elm
2016
76

42

34

8

5

$350 - $444
Villages of Carmel, Denton
2017
94

46

48

33

4

$290 - $360
Kaufman County:
Park Trails, Forney
2015
85

80

5

2

7

$240 - $280
Rockwall County:
Heath Golf and Yacht, Heath
2016
91

59

32

9

2

$294 - $490
Woodcreek, Fate
2017
83

65

18

13

3

$267 - $330
Tarrant County:
Chisholm Trail Ranch, Fort Worth
2017
70

45

25

15

1

$270 - $375
Lakes of River Trails, Fort Worth
2011
143

123

20

20

2

$317 - $416
Ventana, Benbrook
2017
61

31

30

17

2

$318 - $430
Closed Communities
N/A
—

—

—

—

2

Texas Total
4,196

2,409

1,787

402

154

Trendmaker Homes Total
4,196

2,409

1,787

402

154



- 49 -


TRI Pointe Homes
County, Project, City
Year of
First
Delivery (1)
Total
Number of
Lots (2)
Cumulative
Homes
Delivered
as of
March 31,
2019
Lots
Owned as of
March 31, 2019 (3)
Backlog as of
March 31,
2019 (4)(5)
Homes
Delivered
for the Three
Months Ended
March 31,
2019
Sales Price
Range
(in thousands) (6)
Southern California
Orange County:
Aria, Rancho Mission Viejo
2016
151

148

3

2

2

$687 - $719
Viridian
2018
72

21

51

12

4

$895 - $982
Sterling Row Townhomes, Irvine
2017
96

96

—

—

1

$572 - $779
Varenna at Orchard Hills, Irvine
2016
89

79

10

5

6

$1,225 - $1,326
Alston, Anaheim
2017
75

72

3

3

12

$828 - $869
StrataPointe, Buena Park
2017
149

133

16

15

8

$564 - $720
Lyric
2019
70

15

55

10

15

$790 - $937
Citron at Bedford
2019
35

7

28

11

7

$383 - $411
San Diego County:
Prism at Weston
2018
142

42

100

13

8

$574 - $632
Talus at Weston
2018
63

37

26

9

5

$680 - $730
Riverside County:
Terrassa Court, Corona
2015
94

94

—

—

1

$421 - $499
Terrassa Villas, Corona
2015
52

49

3

1

3

$491 - $549
Cassis at Rancho Soleo
2020
79

—

79

—

—

TBD
Cava at Rancho Soleo
2020
63

—

63

—

—

TBD
Cerro at Rancho Soleo
2020
103

—

103

—

—

TBD
Los Angeles County:
VuePointe, El Monte
2017
102

98

4

1

11

$479 - $587
Bradford at Rosedale, Azusa
2017
52

52

—

—

1

$816 - $906
Lucera at Aliento
2017
67

66

1

—

4

$622 - $648
Tierno at Aliento
2017
63

49

14

—

—

$667 - $695
Tierno II at Aliento
2018
63

15

48

7

5

$642 - $703
Paloma at West Creek
2018
155

67

88

13

17

$453 - $516
Mystral
2019
78

—

78

17

—

$635 - $679
Celestia
2019
72

—

72

20

—

$597 - $626
San Bernardino County:
St. James at Park Place, Ontario
2015
125

119

6

—

—

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

43

39

11

6

$509 - $560
Ivy at The Preserve
2020
113

—

113

—

—

TBD
Hazel at The Preserve
2020
133

—

133

—

—

TBD
Tempo at The Resort
2019
80

—

80

—

—

TBD
Southern California Total
2,518

1,302

1,216

150

116

Northern California
Contra Costa County:
Wynstone at Barrington, Brentwood
2017
92

83

9

5

6

$536 - $675
Greyson Place
2019
44

—

44

1

—

$910 - $980
Santa Clara County:
Madison Gate
2018
65

30

35

—

6

$815 - $1,134
Luchessa
2019
49

—

49

—

—

$755 - $799
The Grove
2019
64

—

64

—

—

$850 - $920
The Heights
2020
25

—

25

—

—

TBD
Solano County:
Bloom at Green Valley, Fairfield
2018
91

38

53

8

7

$530 - $570
Harvest at Green Valley, Fairfield
2018
56

33

23

3

5

$550 - $630
Lantana, Fairfield
2019
133

—

133

23

—

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

108

5

—

—

$648 - $721
Sundance II, Mountain House
2017
138

65

73

8

6

$648 - $721

- 50 -


Alameda County:





Commercial, Alameda Landing
2019
2

—

2

2

—

$500
Blackstone at the Cannery, Hayward SFA
2016
105

105

—

—

1

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

54

2

2

3

$1,125 - $1,225
Onyx at Jordan Ranch, Dublin
2017
105

61

44

3

7

$899 - $951
Quartz at Jordan Ranch, Dublin
2018
45

34

11

6

4

$958 - $1,098
Apex, Fremont
2018
77

45

32

2

6

$784 - $1,096
Palm, Fremont
2019
31

3

28

5

3

$2,119 - $2,225
Ellis at Central Station, Oakland
2019
128

—

128

—

—

$711 - $807
Sacramento County:
Natomas
2019
94

—

94

—

—

$344 - $410
Placer County:
Twelve Bridges
2019
102

—

102

—

—

$432 - $528
San Francisco County:





Lofton at NOPO, San Francisco
2020
54

—

54

—

—

$995 - $1,237
Northern California Total
1,669

659

1,010

68

54

California Total
4,187

1,961

2,226

218

170

Colorado





Douglas County:
Terrain Ravenwood Village (3500)
2018
157

50

107

26

16

$375 - $427
Terrain Ravenwood Village (4000)
2018
100

39

61

20

6

$403 - $471
Trails at Crowfoot
2020
100

—

100

—

—

TBD
Sterling Ranch
2020
80

—

80

—

—

TBD
The Canyons
2020
89

—

89

—

—

TBD
Jefferson County:
Candelas 6000 Series, Arvada
2015
76

76

—

—

1

$516 - $656
Candelas 3500 Series, Arvada
2016
97

92

5

5

11

$408 - $466
Candelas 5000 Series, Arvada
2017
62

56

6

3

12

$516 - $584
Candelas 4020 Series, Arvada
2019
98

3

95

35

3

$465 - $520
Crown Pointe, Westminster
2019
64

2

62

25

2

$430 - $482
Arapahoe County:
Whispering Pines, Aurora
2016
115

69

46

22

5

$636 - $681
Adams County:
Amber Creek, Thornton
2017
121

84

37

17

16

$398 - $483
Colorado Total
1,159

471

688

153

72

TRI Pointe Total
5,346

2,432

2,914

371

242



- 51 -


Winchester Homes
County, Project, City
Year of
First
Delivery (1)
Total
Number of
Lots (2)
Cumulative
Homes
Delivered
as of
March 31,
2019
Lots
Owned as of
March 31, 2019 (3)
Backlog as of
March 31,
2019 (4)(5)
Homes
Delivered
for the Three
Months Ended
March 31,
2019
Sales Price
Range
(in thousands) (6)
Maryland
Anne Arundel County:
Two Rivers Townhomes, Crofton
2017
100

43

57

15

4

$450 - $560
Two Rivers Cascades SFD, Crofton
2018
37

16

21

7

—

$540 - $625
Watson's Glen, Millersville
2015
103

4

99

—

—

TBD
Frederick County:
Landsdale, Monrovia
Landsdale SFD
2015
222

130

92

16

5

$495 - $597
Landsdale Townhomes
2015
100

78

22

4

2

$330 - $383
Landsdale TND Neo SFD
2015
77

47

30

6

3

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

210

149

14

6

$510 - $760
Cabin Branch Avenue Townhomes
2017
121

59

62

5

7

$420 - $488
Cabin Branch Townhomes
2014
507

303

204

11

4

$360 - $458
Preserve at Stoney Spring - Lots for Sale
N/A
4

—

4

—

—

N/A
Glenmont MetroCenter, Silver Spring
2016
171

81

90

23

6

$435 - $513
Chapman Row, Rockville
2019
61

—

61

6

—

$710 - $799
Randolph Farms, Rockville
2019
104

—

104

—

—

TBD
Closed Communities
N/A
—

—

—

—

1

Maryland Total
1,966

971

995

107

38

Virginia
Fairfax County:
Stuart Mill, Oakton - Lots for Sale
N/A
5

—

5

—

—

N/A
Westgrove, Fairfax
2018
24

5

19

9

4

$1,001 - $1,107
West Oaks Corner, Fairfax
2019
188

—

188

—

—

TBD
Loudoun County:
Brambleton, Ashburn
West Park SFD
2018
48

24

24

14

4

$700 - $724
Birchwood AA
2018
37

14

23

15

5

$577 - $634
Vistas at Lansdowne, Lansdowne
2015
120

115

5

5

6

$536 - $576
Willowsford Grant II, Aldie
2016
55

23

32

11

—

$950 - $1,226
Closed Communities
N/A
—

—

—

—

1

Virginia Total
477

181

296

54

20

Winchester Total
2,443

1,152

1,291

161

58

Combined Company Total
31,918

9,277

22,641

1,842

814

__________
(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 March 31, 2019 include owned lots in backlog as of March 31, 2019 .
(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 March 31, 2019 , 1,160 homes are under construction, 317 homes have completed construction, and 365 homes have not started construction.
(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.

- 52 -


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, 2018 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 842, 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, 2018. 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 842.
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 three months ended March 31, 2019 . We did not enter into during the three months ended March 31, 2019 , 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 March 31, 2019 .
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 March 31, 2019 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 March 31, 2019 .

- 53 -


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, 2018.  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 21, 2019, our board of directors discontinued and cancelled the 2018 Repurchase Program and approved the 2019 Repurchase Program, authorizing the repurchase of shares of common stock with an aggregate value of up to $100 million through March 31, 2020. Purchases of common stock pursuant to the 2019 Repurchase Program may be made in open market transactions effected through a broker-dealer at prevailing market prices, in block trades, or by other means in accordance with federal securities laws, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 under the Exchange Act. We are not obligated under the 2019 Repurchase Program to repurchase any specific number or dollar amount of shares of common stock, and we may modify, suspend or discontinue the 2019 Repurchase Program at any time. Our management will determine the timing and amount of repurchase in its discretion based on a variety of factors, such as the market price of our common stock, corporate requirements, general market economic conditions and legal requirements. Through the date of the filing of this Quarterly Report on Form 10-Q, no shares of common stock have been repurchased under the 2019 Repurchase Program.


- 54 -



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))
10.1 †
Amended and Restated 2013 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (filed February 26, 2019))
10.2 †
Form of Non-Employee Director Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (filed February 26, 2019))
10.3 †
Form of Time-Vested Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (filed February 26, 2019))
10.4 †
Form of Time-Vested Restricted Stock Unit Award Agreement
10.5 †
Form of Performance-Based Cash Award Agreement
10.6 †
Form of Performance-Based Restricted Stock Unit Award Agreement (earnings per share)
10.7 †
Form of Performance-Based Restricted Stock Unit Award Agreement (total stockholder return)
Second Amended and Restated Credit Agreement, dated as of March 29, 2019, among TRI Pointe Group, Inc., U.S. Bank National Association, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (filed April 4, 2019))
Second Amendment to Tax Sharing Agreement, dated as of March 29, 2019, among TRI Pointe Group, Inc., TRI Pointe Homes, Inc., TRI Pointe Holdings, Inc. and Weyerhaeuser Company (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (filed April 4, 2019))
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 three months ended March 31, 2019, 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.
†
Management Contract or Compensatory Plan or Arrangement


- 55 -


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.
Date: April 25, 2019
By:
/s/ Douglas F. Bauer
Douglas F. Bauer
Chief Executive Officer
(Principal Executive Officer)
Date: April 25, 2019
By:
/s/ Michael D. Grubbs
Michael D. Grubbs
Chief Financial Officer
(Principal Financial Officer)

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TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits

Exhibits

3.1 Amended and Restated Certificate of Incorporation of TRI Pointe Group, Inc. (incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K (filed July 7, 2015)) 3.2 Amended and Restated Bylaws of TRI Pointe Group, Inc. (incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K (filed October 27, 2016)) 10.1 Amended and Restated 2013 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (filed February 26, 2019)) 10.2 Form of Non-Employee Director Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K (filed February 26, 2019)) 10.3 Form of Time-Vested Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K (filed February 26, 2019)) 10.4 Form of Time-Vested Restricted Stock Unit Award Agreement 10.5 Form of Performance-Based Cash Award Agreement 10.6 Form of Performance-Based Restricted Stock Unit Award Agreement (earnings per share) 10.7 Form of Performance-Based Restricted Stock Unit Award Agreement (total stockholder return) 10.8 Second Amended and Restated Credit Agreement, dated as of March 29, 2019, among TRI Pointe Group, Inc., U.S. Bank National Association, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (filed April 4, 2019)) 10.9 Second Amendment to Tax Sharing Agreement, dated as of March 29, 2019, among TRI Pointe Group, Inc., TRI Pointe Homes, Inc., TRI Pointe Holdings, Inc. and Weyerhaeuser Company (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K (filed April 4, 2019)) 31.1 Chief Executive Officer Section302 Certification of the Sarbanes-Oxley Act of 2002 31.2 Chief Financial Officer Section302 Certification of the Sarbanes-Oxley Act of 2002 32.1 Chief Executive Officer Section906 Certification of the Sarbanes-Oxley Act of 2002 32.2 Chief Financial Officer Section906 Certification of the Sarbanes-Oxley Act of 2002