Tri Pointe Homes(TPH) - 2018 Q4 - Annual Report

Part I Business TRI Pointe Group is a national homebuilder operating through six regional brands in ten states, focusing on high-growth markets and offering diverse home products Our Company and Competitive Strengths Founded in 2009, TRI Pointe has grown into a national homebuilder with six brands, delivering 5,071 homes in 2018 at an average price of $640,000, leveraging experienced leadership and operational discipline - The company operates through six homebuilding brands: Maracay, Pardee Homes, Quadrant Homes, Trendmaker Homes, TRI Pointe Homes, and Winchester Homes[26] - In late 2018, the company expanded into the Carolinas and acquired Dunhill Homes, LLC to enter the Dallas–Fort Worth market, which now operates under the Trendmaker Homes brand[23] - Competitive strengths are identified as experienced leadership, focus on high-growth markets, strong operational discipline, ability to acquire attractive land, diverse product offerings, efficient cost structure, and prudent leverage[25][26][27] Key Operational Metrics (2017-2018) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Homes Delivered | 5,071 | 4,697 | | Average Sales Price ($) | $640,000 | $582,000 | | Active Selling Communities (Year-End) | 146 | - | | Lots Owned or Controlled (Year-End) | 27,740 | - | Lots Owned or Controlled and Project Details As of December 31, 2018, the company owned or controlled 27,740 lots across its six homebuilding brands, with Pardee Homes holding the largest share Lots Owned or Controlled by Brand as of Dec 31, 2018 | Brand | Lots Owned | Lots Controlled | Total Lots Owned or Controlled | | :--- | :--- | :--- | :--- | | Maracay | 2,346 | 962 | 3,308 | | Pardee Homes | 13,700 | 676 | 14,376 | | Quadrant Homes | 883 | 861 | 1,744 | | Trendmaker Homes | 1,661 | 831 | 2,492 | | TRI Pointe Homes | 3,150 | 945 | 4,095 | | Winchester Homes | 1,317 | 408 | 1,725 | | Total | 23,057 | 4,683 | 27,740 | Combined Company Project Summary as of Dec 31, 2018 | Metric | Value | | :--- | :--- | | Total Number of Lots | 32,736 | | Cumulative Homes Delivered | 9,627 | | Lots Owned | 23,057 | | Backlog (Homes) | 1,335 | | Homes Delivered (FY 2018) | 5,071 | Operations and Strategy The company's operations include structured land acquisition, general contracting with subcontractors, diverse sales and marketing, and financial services through TRI Pointe Solutions, supported by a warranty program and flexible financing - The land acquisition process includes due diligence, environmental reviews, and the use of option contracts to minimize risk. Option contracts require non-refundable deposits for the right to acquire land at fixed prices[55][56] - The company acts as a general contractor and uses subcontractors for construction work, maintaining strong relationships through timely payments and schedule management[59] - The homebuyer cancellation rate was 18% in 2018, up from 15% in 2017. The inventory of completed and unsold homes was 417 at the end of 2018, compared to 269 at the end of 2017[62] - Backlog dollar value was approximately $897.3 million as of December 31, 2018, a decrease from $1.0 billion at the end of 2017[69] - The company's financial services operation, TRI Pointe Solutions, includes TRI Pointe Connect (mortgage), TRI Pointe Assurance (title), and TRI Pointe Advantage (property and casualty insurance)[63] Segments, Regulation, Competition, and Employees The company operates in homebuilding and financial services segments, facing extensive government regulation and intense competition for homebuyers, land, financing, and labor, with 1,435 employees as of December 31, 2018 - The company has two reportable business segments: Homebuilding (comprising six brands) and Financial Services (TRI Pointe Solutions)[74][75][76] - The company faces significant government regulation related to zoning, development, environmental laws (storm water, wetlands, endangered species), and building codes, which can lead to delays and increased costs[78][80] - Competition is intense from large national and smaller local homebuilders for homebuyers, land, financing, and labor. The company also competes with the resale market for existing homes[84] - As of December 31, 2018, the company had 1,435 employees, with 577 in executive/administrative roles, 334 in sales/marketing, and 524 in field construction[85] Risk Factors The company faces material business risks from real estate cyclicality, land acquisition, financing, and regulations, alongside financial risks from indebtedness and organizational risks related to key personnel and internal controls Risks Related to Our Business Business risks include real estate cyclicality, land acquisition challenges, mortgage financing availability, interest rate fluctuations, regulatory changes, labor shortages, natural disasters, geographic concentration, and increased home order cancellation rates - The residential homebuilding industry is cyclical and highly sensitive to general economic conditions, interest rates, and consumer confidence[93] - Future growth is dependent on the ability to acquire attractive land parcels at reasonable prices, which is subject to competition and market conditions[90] - Rising interest rates and tighter credit standards could reduce demand for homes and increase cancellation rates, as most homebuyers rely on financing[97] - The company faces risks from natural disasters like wildfires and earthquakes in California, and hurricanes and floods in Texas, which can cause project delays and increase costs[103] - The home order cancellation rate increased to 18% in 2018 from 15% in 2017, posing a risk to revenue and margins if the trend continues[137] Risks Related to Our Indebtedness The company's leverage exposes it to financial risks, including difficulty servicing obligations, vulnerability to economic conditions, limitations from restrictive debt covenants, and potential negative impacts from credit rating downgrades - The company's use of leverage subjects it to risks such as insufficient cash flow to service debt, vulnerability to interest rate fluctuations, and limitations on obtaining additional financing[160] - Financing arrangements contain restrictive covenants that limit the ability to incur more debt, make certain investments, sell assets, or pay dividends[169] - A downgrade of corporate credit ratings could make it more difficult and costly to access new capital, particularly through the issuance of senior notes[168] Risks Related to Our Organization and Structure Organizational risks include dependence on key personnel, anti-takeover provisions that may affect stock price, potential failures in internal controls, and the company's policy of not paying dividends in the foreseeable future - The company's success is highly dependent on its key executive team, including CEO Douglas Bauer, President Thomas Mitchell, and CFO Michael Grubbs[173] - Anti-takeover provisions in the company's charter and bylaws may delay or prevent a change in control, which could negatively affect the stock price[177][178] - The company does not intend to pay dividends on its common stock for the foreseeable future, retaining earnings to finance business expansion[185] - A stock repurchase program was approved in February 2019, but there is no obligation to repurchase shares, and such actions could increase stock price volatility while diminishing cash reserves[190][191] Properties The company leases its corporate headquarters and various division offices, which management deems suitable and adequate for its operational needs - The company's corporate headquarters and various division offices are located in leased spaces[193] Legal Proceedings Pardee Homes settled a lawsuit with Scripps Health in January 2019 for $17.5 million related to a 1989 property sale, resulting in the dismissal of the case - Pardee Homes, a subsidiary, was involved in a lawsuit with Scripps Health concerning a 1989 property sale[194] - The lawsuit was settled in January 2019 with Pardee Homes agreeing to a payment of $17.5 million[195] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under 'TPH', repurchased 10.4 million shares for $146.1 million in 2018, and does not intend to pay dividends, retaining earnings for growth - The company's common stock is listed on the New York Stock Exchange (NYSE) under the ticker symbol "TPH"[198] - A new share repurchase program was approved on February 21, 2019, authorizing up to $100 million in repurchases through March 31, 2020[201] - The company has not paid dividends and does not intend to in the foreseeable future, retaining earnings to finance growth[205] Share Repurchases (Year Ended Dec 31, 2018) | Metric | Value | | :--- | :--- | | Shares Repurchased | 10,392,609 | | Average Price Paid ($) | $14.05 | | Aggregate Dollar Amount ($ million) | $146.1 | Selected Financial Data This section presents selected historical financial and operating data, showing $3.26 billion in total revenues and $269.9 million in net income for 2018, with 5,071 homes delivered at an average price of $640,000 Selected Financial Data (2016-2018) | Metric (in thousands, except per share) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total Revenues | $3,261,009 | $2,808,901 | $2,403,922 | | Net Income Available to Common Stockholders | $269,911 | $187,191 | $195,171 | | Diluted EPS ($) | $1.81 | $1.21 | $1.21 | | New Homes Delivered | 5,071 | 4,697 | 4,211 | | Average Sales Price of Homes Delivered ($ thousands) | $640 | $582 | $553 | | Total Assets (at period end) | $3,884,203 | $3,805,381 | $3,564,640 | | Total Debt, net (at period end) | $1,410,804 | $1,471,302 | $1,382,033 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting a 19% increase in 2018 home sales revenue despite softening demand and an 8% decrease in new home orders, while maintaining optimism for long-term prospects Overview and Outlook In 2018, home sales revenue grew 19% due to increased deliveries and average sales price, though net new home orders declined 8% and backlog value fell 13% due to softening demand, while the long-term outlook remains positive - Management observed a softening of consumer demand in the second half of 2018, citing higher borrowing costs, significant home price appreciation, and general economic uncertainties as likely causes[212] Key Performance Changes (2018 vs. 2017) | Metric | Change | | :--- | :--- | | Deliveries | +8% | | Average Sales Price | +10% | | Home Sales Revenue | +19% | | Homebuilding Gross Margins (bps) | +130 to 21.8% | | New Home Orders | -8% | | Backlog Units (Year-End) | -15% | | Backlog Dollar Value (Year-End) | -13% | Results of Operations (2018 vs. 2017) In 2018, net new home orders decreased 8%, while home sales revenue increased 19% to $3.2 billion due to higher deliveries and average sales price, with gross margin improving to 21.8% and the effective tax rate decreasing to 25.0% - Net new home orders decreased by 8% in 2018, primarily due to a 9% decrease in the monthly absorption rate, with notable slowdowns in Northern California and Seattle[218] - Homebuilding gross margin percentage increased by 130 basis points to 21.8% in 2018, primarily due to a favorable mix of deliveries from higher-margin California communities[227] - The effective tax rate for 2018 was 25.0%, a significant decrease from 44.8% in 2017, mainly due to the lower federal corporate tax rate from the Tax Cuts and Jobs Act[235] Backlog Comparison (as of Dec 31) | Metric | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Backlog Units | 1,335 | 1,571 | (15)% | | Backlog Dollar Value ($ million) | $897.3 | $1,032.8 | (13)% | | Avg. Sales Price in Backlog ($) | $672,000 | $657,000 | +2% | Home Sales Revenue and Deliveries (2018 vs. 2017) | Metric | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Home Sales Revenue ($ billion) | $3.24 | $2.73 | +19% | | New Homes Delivered | 5,071 | 4,697 | +8% | | Average Sales Price ($) | $640,000 | $582,000 | +10% | Results of Operations (2017 vs. 2016) In 2017, net new home orders increased 19% and home sales revenue grew 17% to $2.7 billion, despite a slight decrease in gross margin to 20.5%, while the effective tax rate rose to 44.8% due to a one-time charge - Net new home orders increased by 19% in 2017, driven by strong demand that led to a 10% increase in monthly absorption rates and an 8% increase in average selling communities[241] - Homebuilding gross margin percentage decreased to 20.5% in 2017 from 21.2% in 2016, attributed to the mix of homes delivered and increased labor and materials costs[251] - The effective tax rate increased to 44.8% in 2017, primarily due to a $22.0 million charge related to the re-measurement of deferred tax assets following the enactment of the Tax Cuts and Jobs Act[260] Home Sales Revenue and Deliveries (2017 vs. 2016) | Metric | 2017 | 2016 | % Change | | :--- | :--- | :--- | :--- | | Home Sales Revenue ($ billion) | $2.73 | $2.33 | +17% | | New Homes Delivered | 4,697 | 4,211 | +12% | | Average Sales Price ($) | $582,000 | $553,000 | +5% | Liquidity and Capital Resources As of December 31, 2018, the company had $277.7 million in cash, $1.4 billion in senior notes, and $568.2 million available on its credit facility, with improved debt-to-capital ratios of 40.7% and 35.5% - The company ended 2018 with $277.7 million in cash and cash equivalents and believes it has sufficient liquidity for at least the next twelve months[265] - As of Dec 31, 2018, the company had $1.4 billion in outstanding senior notes and no outstanding balance on its $600 million unsecured revolving credit facility, with $568.2 million available[269][272] - Net cash provided by operating activities was $310.7 million in 2018, a significant increase from $101.7 million in 2017, primarily due to decreased spending on real estate inventories and higher net income[275] - The company has contractual obligations totaling approximately $2.6 billion, with the largest components being long-term debt principal ($1.4 billion) and purchase obligations for land ($741.2 million)[282] Leverage Ratios (as of Dec 31) | Ratio (%) | 2018 | 2017 | | :--- | :--- | :--- | | Debt-to-Capital | 40.7% | 43.3% | | Net Debt-to-Net Capital | 35.5% | 38.1% | Critical Accounting Policies Critical accounting policies involve significant judgments and estimates for Revenue Recognition (ASC 606), Real Estate Inventories and Cost of Sales, Warranty Reserves, Income Taxes, and Goodwill and Other Intangible Assets impairment testing - The company adopted ASC 606 (Revenue from Contracts with Customers) on January 1, 2018, which did not materially change the timing of revenue recognition but did alter the accounting for certain sales and marketing costs[287] - Real estate inventories are stated at cost and reviewed quarterly for impairment. Impairment is recognized if the estimated remaining undiscounted future cash flows are less than the asset's carrying value[291][294] - Warranty reserves are based on actuarial analysis using historical claim data. Key assumptions include claim frequencies, severities, and resolution patterns[298][299] - Goodwill of $139.3 million is allocated to the TRI Pointe Homes reporting unit and is tested for impairment annually as of October 1. No impairment was indicated in the 2018 assessment[306][307] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its $1.43 billion fixed-rate debt as of December 31, 2018, with no use of derivatives for trading or speculation - The company's primary market risk is related to interest rate fluctuations on its debt[315] Debt Maturity Profile as of Dec 31, 2018 (Principal Amount) | Maturity Period | Fixed Rate Debt (in thousands) | | :--- | :--- | | 2019 | $381,895 | | 2020 | $0 | | 2021 | $300,000 | | 2022 | $0 | | 2023 | $0 | | Thereafter | $750,000 | | Total | $1,431,895 | Financial Statements and Supplementary Data This section refers to Item 15, containing the company's audited consolidated financial statements and supplementary data for the fiscal year ended December 31, 2018 - The full financial statements and supplementary data are located in Item 15 of the report[317] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with an unqualified opinion from Ernst & Young LLP - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[319] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018[321] - No changes in internal control over financial reporting occurred during the fourth quarter of 2018 that materially affected, or are reasonably likely to materially affect, internal controls[323] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Security Ownership Information for Items 10 through 14, covering directors, executive officers, corporate governance, compensation, and security ownership, is incorporated by reference from the company's 2019 proxy statement - Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, and principal accountant fees is incorporated by reference from the 2019 Proxy Statement[337][338][339] Part IV Exhibits, Financial Statements and Financial Statement Schedules This section contains the company's audited consolidated financial statements for the year ended December 31, 2018, including the Report of Independent Registered Public Accounting Firm and accompanying notes, along with a list of exhibits - This section includes the audited consolidated financial statements for the years ended December 31, 2018, 2017, and 2016, and the related notes[340] - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements[345]