TRI POINTE GROUP, INC., 10-K filed on 2/19/2020
Annual Report
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Cover Page - USD ($)
12 Months Ended
Dec. 31, 2019
Feb. 06, 2020
Jun. 28, 2019
Cover page.      
Document Type 10-K    
Document Annual Report true    
Document Period End Date Dec. 31, 2019    
Document Transition Report false    
Entity File Number 1-35796    
Entity Registrant Name TRI Pointe Group, Inc.    
Entity Incorporation, State or Country Code DE    
Entity Tax Identification Number 61-1763235    
Entity Address, Address Line One 19540 Jamboree Road    
Entity Address, Address Line Two Suite 300    
Entity Address, City or Town Irvine    
Entity Address, State or Province CA    
Entity Address, Postal Zip Code 92612    
City Area Code 949    
Local Phone Number 438-1400    
Title of 12(b) Security Common Stock, par value $0.01 per share    
Trading Symbol TPH    
Security Exchange Name NYSE    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Interactive Data Current Yes    
Entity Filer Category Large Accelerated Filer    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Shell Company false    
Entity Public Float     $ 1,671,655,364
Entity Common Stock, Shares Outstanding   136,080,148  
Amendment Flag false    
Document Fiscal Year Focus 2019    
Document Fiscal Period Focus FY    
Entity Central Index Key 0001561680    
Current Fiscal Year End Date --12-31    
Documents Incorporated by Reference
Portions from the registrant’s proxy statement relating to its 2020 annual meeting of stockholders are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14.
   
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Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2019
Dec. 31, 2018
Assets    
Cash and cash equivalents $ 329,011 $ 277,696
Receivables 69,276 51,592
Real estate inventories 3,065,436 3,216,059
Investments in unconsolidated entities 11,745 5,410
Goodwill and other intangible assets, net 159,893 160,427
Deferred tax assets, net 49,904 67,768
Other assets 173,425 105,251
Total assets 3,858,690 3,884,203
Liabilities    
Accounts payable 66,120 81,313
Accrued expenses and other liabilities 322,043 335,149
Loans payable 250,000 0
Senior notes, net 1,033,985 1,410,804
Total liabilities 1,672,148 1,827,266
Commitments and contingencies
Stockholders’ Equity:    
Preferred stock, $0.01 par value, 50,000,000 shares authorized; no shares issued and outstanding as of December 31, 2019 and 2018, respectively 0 0
Common stock, $0.01 par value, 500,000,000 shares authorized; 136,149,633 and 141,661,713 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively 1,361 1,417
Additional paid-in capital 581,195 658,720
Retained earnings 1,603,974 1,396,787
Total stockholders’ equity 2,186,530 2,056,924
Noncontrolling interests 12 13
Total equity 2,186,542 2,056,937
Total liabilities and equity $ 3,858,690 $ 3,884,203
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Consolidated Balance Sheets (Parenthetical) - $ / shares
Dec. 31, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Preferred stock, par value (in dollars per share) $ 0.01 $ 0.01
Preferred stock authorized (shares) 50,000,000 50,000,000
Preferred stock issued (shares) 0 0
Preferred stock outstanding (shares) 0 0
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock authorized (shares) 500,000,000 500,000,000
Common stock issued (shares) 136,149,633 141,661,713
Common stock outstanding (shares) 136,149,633 141,661,713
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Consolidated Statements of Operations - USD ($)
$ in Thousands
3 Months Ended 12 Months Ended
Dec. 31, 2019
Sep. 30, 2019
Jun. 30, 2019
Mar. 31, 2019
Dec. 31, 2018
Sep. 30, 2018
Jun. 30, 2018
Mar. 31, 2018
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Revenues $ 1,141,274 $ 748,395 $ 698,714 $ 494,632 $ 1,132,697 $ 775,071 $ 771,303 $ 583,676 $ 3,083,015 $ 3,262,747 $ 2,810,272
Other operations expense                 2,434 3,174 2,298
Sales and marketing                 195,148 187,267 137,066
General and administrative                 157,161 155,030 137,764
Homebuilding income from operations                 253,859 353,204 343,634
Equity loss of unconsolidated entities                 (52) (393) (11,433)
Other income (loss), net                 6,857 (419) 151
Homebuilding income before income taxes                 260,664 352,392 332,352
Equity in income of unconsolidated entities                 9,316 8,517 6,426
Financial services income before income taxes                 10,423 9,673 7,466
Income before income taxes                 271,087 362,065 339,818
Provision for income taxes                 (63,900) (90,552) (152,267)
Net income 117,993 62,861 26,262 71 100,984 63,969 63,680 42,880 207,187 271,513 187,551
Net income attributable to noncontrolling interests 0 0 0 0 (1,602) 0 0 0 0 (1,602) (360)
Net income available to common stockholders $ 117,993 $ 62,861 $ 26,262 $ 71 $ 99,382 $ 63,969 $ 63,680 $ 42,880 $ 207,187 $ 269,911 $ 187,191
Earnings per share                      
Basic (in dollars per share) $ 0.85 $ 0.45 $ 0.18 $ 0 $ 0.70 $ 0.43 $ 0.42 $ 0.28 $ 1.47 $ 1.82 $ 1.21
Diluted (in dollars per share) $ 0.85 $ 0.44 $ 0.18 $ 0 $ 0.70 $ 0.43 $ 0.42 $ 0.28 $ 1.47 $ 1.81 $ 1.21
Weighted average shares outstanding                      
Basic (shares)                 140,851,444 148,183,431 154,134,411
Diluted (shares)                 141,394,227 149,004,690 155,085,366
Home sales                      
Home sales                 $ 3,069,375 $ 3,244,087 $ 2,732,299
Cost of home sales                 2,462,708 2,536,899 2,173,251
Land and lot sales                      
Home sales                 7,176 8,758 74,269
Cost of home sales                 7,711 25,435 14,888
Other operations                      
Revenues                 2,470 8,164 2,333
Homebuilding                      
Revenues                 3,079,021 3,261,009 2,808,901
Financial services                      
Revenues                 3,994 1,738 1,371
Cost of home sales                 $ 2,887 $ 582 $ 331
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Consolidated Statements of Equity - USD ($)
$ in Thousands
Total
Common Stock
Additional Paid-in Capital
Retained Earnings
Total Stockholders’ Equity
Noncontrolling Interests
Beginning balance at Dec. 31, 2016 $ 1,848,510 $ 1,586 $ 880,822 $ 947,039 $ 1,829,447 $ 19,063
Beginning balance (shares) at Dec. 31, 2016   158,626,229        
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income 187,551     187,191 187,191 360
Shares issued under share-based awards 12,291 $ 16 12,275   12,291  
Shares issued under share-based awards (shares)   1,531,475        
Minimum tax withholding paid on behalf of employees for restricted stock units (2,896)   (2,896)   (2,896)  
Stock-based compensation expense 15,906   15,906   15,906  
Share repurchases (112,217) $ (90) (112,127)   (112,217)  
Share repurchases (shares)   (8,994,705)        
Distributions to noncontrolling interests, net (1,333)         (1,333)
Net effect of consolidations, de-consolidations and other transactions (17,485)         (17,485)
Ending balance at Dec. 31, 2017 1,930,327 $ 1,512 793,980 1,134,230 1,929,722 605
Ending balance (shares) at Dec. 31, 2017   151,162,999        
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income 271,513     269,911 269,911 1,602
Shares issued under share-based awards 1,943 $ 9 1,934   1,943  
Shares issued under share-based awards (shares)   891,323        
Minimum tax withholding paid on behalf of employees for restricted stock units (6,049)   (6,049)   (6,049)  
Stock-based compensation expense 14,814   14,814   14,814  
Share repurchases (146,063) $ (104) (145,959)   (146,063)  
Share repurchases (shares)   (10,392,609)        
Distributions to noncontrolling interests, net (2,194)         (2,194)
Ending balance at Dec. 31, 2018 $ 2,056,937 $ 1,417 658,720 1,396,787 2,056,924 13
Ending balance (shares) at Dec. 31, 2018 141,661,713 141,661,713        
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income $ 207,187     207,187 207,187  
Shares issued under share-based awards 449 $ 6 443   449  
Shares issued under share-based awards (shares)   623,542        
Minimum tax withholding paid on behalf of employees for restricted stock units (3,612)   (3,612)   (3,612)  
Stock-based compensation expense 14,806   14,806   14,806  
Share repurchases (89,224) $ (62) (89,162)   (89,224)  
Share repurchases (shares)   (6,135,622)        
Net effect of consolidations, de-consolidations and other transactions (1)         (1)
Ending balance at Dec. 31, 2019 $ 2,186,542 $ 1,361 $ 581,195 $ 1,603,974 $ 2,186,530 $ 12
Ending balance (shares) at Dec. 31, 2019 136,149,633 136,149,633        
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Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Cash flows from operating activities:      
Net income $ 207,187 $ 271,513 $ 187,551
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization 28,396 29,097 3,500
Equity in (income) loss of unconsolidated entities, net (9,264) (8,124) 5,007
Deferred income taxes, net 17,864 11,074 46,810
Amortization of stock-based compensation 14,806 14,814 15,906
Charges for impairments and lot option abandonments 24,875 5,085 2,053
Changes in assets and liabilities:      
Real estate inventories 120,272 (91,757) (205,229)
Receivables (17,684) 74,545 (44,280)
Other assets (12,369) (9,895) 13,487
Accounts payable (15,193) 3,222 2,618
Accrued expenses and other liabilities (52,118) 1,906 67,036
Returns on investments in unconsolidated entities, net 9,208 9,182 7,215
Net cash provided by operating activities 315,980 310,662 101,674
Cash flows from investing activities:      
Purchases of property and equipment (30,282) (31,651) (2,605)
Proceeds from sale of property and equipment 46 8 6
Investments in unconsolidated entities (7,022) (2,274) (980)
Net cash paid for acquisition 0 (61,495) 0
Net cash used in investing activities (37,258) (95,412) (3,579)
Cash flows from financing activities:      
Borrowings from debt 400,000 125,000 500,000
Repayment of debt (531,895) (193,105) (413,726)
Debt issuance costs (3,125) 0 (5,957)
Distributions to noncontrolling interests 0 (2,194) (1,333)
Proceeds from issuance of common stock under share-based awards 449 1,943 12,291
Minimum tax withholding paid on behalf of employees for share-based awards (3,612) (6,049) (2,896)
Share repurchases (89,224) (146,063) (112,217)
Net cash used in financing activities (227,407) (220,468) (23,838)
Net increase (decrease) in cash and cash equivalents 51,315 (5,218) 74,257
Cash and cash equivalents - beginning of year 277,696 282,914 208,657
Cash and cash equivalents - end of year $ 329,011 $ 277,696 $ 282,914
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Organization and Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2019
Accounting Policies [Abstract]  
Organization and Summary of Significant Accounting Policies
Organization and Summary of Significant Accounting Policies
Organization
TRI Pointe Group, Inc. (“TRI Pointe Group”) is engaged in the design, construction and sale of innovative single-family attached and detached homes through its portfolio of six quality brands across 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”).
The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries as well as other entities in which the Company has a controlling interest and variable interest entities (“VIEs”) in which the Company is the primary beneficiary.  The noncontrolling interests as of December 31, 2019 and 2018 represent the outside owners’ interests in the Company’s consolidated entities and the net equity of the VIE owners.  All significant intercompany accounts have been eliminated upon consolidation.
Unless the context otherwise requires, the terms “we”, “us”, “our” and “the Company” used herein refer to TRI Pointe Group and its consolidated subsidiaries.
Reclassifications
Certain amounts for prior years have been reclassified to conform to the current period presentation.
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.
Subsequent Events
We evaluated subsequent events up until our consolidated financial statements were filed with the Securities and Exchange Commission.
Cash and Cash Equivalents and Concentration of Credit Risk
We define cash and cash equivalents as cash on hand, demand deposits with financial institutions, and short-term liquid investments with a maturity date of less than three months from the date of acquisition. The Company’s cash balances exceed federally insurable limits. The Company monitors the cash balances in its operating accounts and adjusts the cash balances as appropriate; however, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, the Company has experienced no loss or lack of access to cash in its operating accounts.
Revenue Recognition
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Codified as “ASC 606”). ASC 606 supersedes the revenue-recognition requirements in ASC Topic 605, Revenue Recognition, most industry-specific guidance throughout the industry topics of the accounting standards codification, and eliminates certain cost guidance related to construction-type and production-type contracts in accordance with ASC 970. In addition, ASC 606
includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which provided updated guidance related to certain costs incurred in obtaining and fulfilling contracts with customers. Collectively, we refer to ASC 606 and Subtopic 340-40 as ASC 606 throughout this filing. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. 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.
Following the adoption of ASC 606 on January 1, 2018, the timing of revenue recognition for all of our contracts remained materially consistent with our historical revenue recognition policy due to the nature of our revenue generating activities, with the most common difference under ASC 606 relating to the deferral of revenue due to these uncompleted performance obligations at the time we deliver new homes to our homebuyers.
Disaggregation of Revenues
We generate revenues from a mix of homebuilding operations and financial services operations. Due to the nature of our revenue generating activities, the disaggregated revenue reported on our consolidated statement of operations, in conjunction with the revenues reported in our segment disclosure, is deemed sufficient to report revenue from contracts with customers in accordance with the disaggregation disclosure requirements of ASC 606. We report total revenues in Note 2, Segment Information, which is fully comprised of our revenues from contracts with customers. While the total homebuilding revenues by segment include a mix of home sales revenue, land and lot sales revenue and other operations revenue, all material revenue amounts outside of home sales revenue are attributed to their respective homebuilding segments in the discussion below. Our consideration of disaggregated revenue consisted of a variety of facts and circumstances pertaining to our contracts with customers. These considerations included the nature, amounts, timing and other characteristics and economic factors present within each revenue line item appearing on our consolidated statement of operations. See below for further commentary regarding each of our revenue streams from contracts with customers.
Home sales revenue
We generate the majority of our total 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 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 homebuilding other 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 and escrow 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 and escrow services operations
TRI Pointe Assurance provides title examinations for our homebuyers in Austin and Colorado and both title examinations and escrow services for our homebuyers in Arizona, Dallas–Fort Worth, Houston, Maryland, Nevada, 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. Revenue from our title and escrow services operations is fully recognized at the time of the consummation of the home sales transaction, at which time no further performance obligations are left to be satisfied. 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.
Real Estate Inventories and Cost of Sales
Real estate inventories consist of land, land under development, homes under construction, completed homes and model homes and are stated at cost, net of impairment losses. We capitalize direct carrying costs, including interest, property taxes and related development costs to inventories. Field construction supervision and related direct overhead are also included in the capitalized cost of inventories. Direct construction costs are specifically identified and allocated to homes while other common costs, such as land, land improvements and carrying costs, are allocated to homes within a community based upon their anticipated relative sales or fair value. In accordance with ASC Topic 835, Interest (“ASC 835”), homebuilding interest capitalized as a cost of inventories owned is included in costs of sales as related units or lots are sold. To the extent our debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the interest incurred by us. Qualified assets represent projects that are actively under development. Homebuilding cost of sales is recognized at the same time revenue is recognized and is recorded based upon total estimated costs to be allocated to each home within a community. Any changes to the estimated costs are allocated to the remaining undelivered lots and homes within their respective community. The estimation and allocation of these costs require a substantial degree of judgment by management.
The estimation process involved in determining relative sales or fair values is inherently uncertain because it involves estimating future sales values of homes before delivery. Additionally, in determining the allocation of costs to a particular land parcel or individual home, we rely on project budgets that are based on a variety of assumptions, including assumptions about construction schedules and future costs to be incurred. It is common that actual results differ from budgeted amounts for various reasons, including construction delays, increases in costs that have not been committed or unforeseen issues encountered during construction that fall outside the scope of existing contracts, or costs that come in less than originally anticipated. While the actual results for a particular construction project are accurately reported over time, a variance between the budget and actual costs could result in the understatement or overstatement of costs and have a related impact on gross margins between reporting periods. To reduce the potential for such variances, we have procedures that have been applied on a consistent basis, including assessing and revising project budgets on a periodic basis, obtaining commitments from subcontractors and vendors for future costs to be incurred and utilizing the most recent information available to estimate costs.
If there are indications of impairment, we perform a detailed budget and cash flow review of our real estate assets to determine whether the estimated remaining undiscounted future cash flows of the community are more or less than the asset’s carrying value. If the undiscounted cash flows are more than the asset’s carrying value, no impairment adjustment is required. However, if the undiscounted cash flows are less than the asset’s carrying value, the asset is deemed impaired and is written down to fair value. These impairment evaluations require us to make estimates and assumptions regarding future conditions, including timing and amounts of development costs and sales prices of real estate assets, to determine if expected future undiscounted cash flows will be sufficient to recover the asset’s carrying value.
When estimating undiscounted cash flows of a community, we make various assumptions, including: (i) expected sales prices and sales incentives to be offered, including the number of homes available, pricing and incentives being offered by us or other builders in other communities, and future sales price adjustments based on market and economic trends; (ii) expected sales pace and cancellation rates based on local housing market conditions, competition and historical trends; (iii) costs expended to date and expected to be incurred including, but not limited to, land and land development costs, home construction
costs, interest costs, indirect construction and overhead costs, and selling costs; (iv) alternative product offerings that may be offered that could have an impact on sales pace, sales price and/or building costs; and (v) alternative uses for the property.
Many assumptions are interdependent and a change in one may require a corresponding change to other assumptions. For example, increasing or decreasing monthly sales absorption rates has a direct impact on the estimated per unit sales price of a home and the level of time sensitive costs (such as indirect construction, overhead and carrying costs). Depending on the underlying objective of the community, assumptions could have a significant impact on the projected cash flow analysis. For example, if our objective is to preserve operating margins, our cash flow analysis will be different than if the objective is to increase sales. These objectives may vary significantly from community to community and over time.
We perform a quarterly review for indicators of impairment. If assets are considered impaired, the impairment charge is determined by the amount the asset’s carrying value exceeds its fair value. Fair value is determined based on estimated future cash flows discounted for inherent risks associated with real estate assets. These discounted cash flows are impacted by expected risk based on estimated land development, construction and delivery timelines; market risk of price erosion; uncertainty of development or construction cost increases; and other risks specific to the asset or market conditions where the asset is located when assessment is made. These factors are specific to each community and may vary among communities. For the years ended December 31, 2019, 2018 and 2017, we recorded real estate inventory impairment charges of $10.1 million, $0 and $854,000, respectively. 
Warranty Reserves
In the normal course of business, we incur warranty-related costs associated with homes that have been delivered to homebuyers. Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related home sales revenues are recognized while indirect warranty overhead salaries and related costs are charged to cost of sales in the period incurred.  Factors that affect the warranty accruals include the number of homes delivered, historical and anticipated rates of warranty claims and cost per claim.  Our primary assumption in estimating the amounts we accrue for warranty costs is that historical claims experience is a strong indicator of future claims experience.  In addition, we maintain general liability insurance designed to protect us against a portion of our risk of loss from warranty and construction-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 is based on actuarial analysis that uses our historical claim and expense data, as well as industry data to estimate these overall costs. Key assumptions used in developing these estimates include claim frequencies, severities and resolution patterns, which can occur over an extended period of time. These estimates are subject to variability due to the length of time between the delivery of a home to a homebuyer and when a warranty or construction defect claim is made, and the ultimate resolution of such claim; uncertainties regarding such claims relative to our markets and the types of product we build; and legal or regulatory actions and/or interpretations, among other factors. Due to the degree of judgment involved and the potential for variability in these underlying assumptions, our actual future costs could differ from those estimated. There can be no assurance that the terms and limitations of the limited warranty will be effective against claims made by homebuyers, that we will be able to renew our insurance coverage or renew it at reasonable rates, that we will not be liable for damages, cost of repairs, and/or the expense of litigation surrounding possible construction defects, soil subsidence or building related claims or that claims will not arise out of uninsurable events or circumstances not covered by insurance and not subject to effective indemnification agreements with certain subcontractors.
We also record expected recoveries from insurance carriers based on actual insurance claims made and actuarially determined amounts that depend on various factors, including, the above-described reserve estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Because of the inherent uncertainty and variability in these assumptions, our actual insurance recoveries could differ significantly from amounts currently estimated.
Investments in Unconsolidated Entities
We have investments in unconsolidated entities over which we have significant influence that we account for using the equity method with taxes provided on undistributed earnings. We record earnings and accrue taxes in the period that the earnings are recorded by our affiliates. Under the equity method, our share of the unconsolidated entities’ earnings or loss is included in equity in (loss) income of unconsolidated entities in the accompanying consolidated statements of operations. We evaluate our investments in unconsolidated entities for impairment when events and circumstances indicate that the carrying value of the investment has been impaired beyond a temporary period of time. For the year ended December 31, 2017, we had a $13.2 million impairment charge related to a joint venture formed as a limited liability company in 1999 for the entitlement
and development of land located in Los Angeles County, California. For the years ended December 31, 2019 and 2018, we did not have any impairment charges related to investments in unconsolidated entities.
Variable Interest Entities
The Company accounts for variable interest entities in accordance with ASC Topic 810, Consolidation (“ASC 810”). Under ASC 810, a variable interest entity (“VIE”) is created when: (a) the equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties, including the equity holders; (b) the entity’s equity holders as a group (i) lack the direct or indirect ability to make decisions about the entity, (ii) are not obligated to absorb expected losses of the entity or (iii) do not have the right to receive expected residual returns of the entity; or (c) the entity’s equity holders have voting rights that are not proportionate to their economic interests, and the activities of the entity involve, or are conducted on behalf of, the equity holder with disproportionately few voting rights. If an entity is deemed to be a VIE pursuant to ASC 810, the enterprise that has both (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb the expected losses of the entity or right to receive benefits from the entity that could be potentially significant to the VIE is considered the primary beneficiary and must consolidate the VIE.
Under ASC 810, a deposit paid to an entity is deemed to be a variable interest that will absorb some or all of the entity’s expected losses if they occur. Our land purchase and lot option deposits generally represent our maximum exposure to the land seller if we elect not to purchase the optioned property. In some instances, we may also expend funds for due diligence, development and construction activities with respect to optioned land prior to takedown. Such costs are classified as inventories owned, which we would have to write off should we not exercise the option. Therefore, whenever we enter into a land option or purchase contract with an entity and make a deposit, a VIE may have been created. In accordance with ASC 810, we perform ongoing reassessments of whether we are the primary beneficiary of a VIE.
Stock-Based Compensation
We account for share-based awards in accordance with ASC Topic 718, Compensation-Stock Compensation (“ASC 718”). ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. ASC 718 requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees.  Share-based awards are expensed on a straight-line basis over the expected vesting period.
Sales and Marketing Expense
Following the adoption of ASC 606 on January 1, 2018, costs incurred for tangible assets directly used in the sales process that were previously capitalized to real estate inventories and amortized to cost of home sales, such as our sales offices, and model landscaping and furnishings, are capitalized to other assets and amortized to selling expense as the underlying homes are delivered. All other sales and marketing costs that were previously capitalized to real estate inventories and amortized to cost of home sales, such as advertising signage, brochures, and model and sales office conversion costs are expensed as incurred as selling expense.
Income Taxes
We account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recorded based on future tax consequences of both temporary differences between the amounts reported for financial reporting purposes and the amounts deductible for income tax purposes, and are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted.
Each quarter we assess our deferred tax assets to determine whether all or any portion of the assets 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. Due to uncertainties inherent in the estimation process, it is possible that actual results may vary from estimates.
The enactment of the Tax Cuts and Jobs Act in the fourth quarter of 2017, among other things, reduced the federal corporate tax rate to 21% from 35%, effective January 1, 2018. This resulted in a $22.0 million reduction in our deferred tax asset for the year ended December 31, 2017. For further details, see Note 15, Income Taxes.
We classify any interest and penalties related to income taxes as part of income tax expense. 
Business Combinations
We account for business combinations in accordance with ASC Topic 805, Business Combinations, if the assets acquired and liabilities assumed constitute a business. For acquired companies constituting a business, we recognize the identifiable assets acquired and liabilities assumed at their acquisition-date fair values and recognize any excess of total consideration paid over the fair value of the identifiable assets as goodwill. During the fourth quarter of 2018, we acquired a Dallas–Fort Worth-based homebuilder for an all cash purchase price of approximately $61.5 million. This transaction was accounted for as a business combination in accordance with ASC Topic 805, Business Combinations. For further details, see Note 5, Real Estate Inventories.
Goodwill and Other Intangible Assets
In accordance with ASC Topic 350, Intangibles-Goodwill and Other (“ASC 350”), we evaluate goodwill and indefinite-lived intangible assets for impairment on an annual basis, or more frequently if events or changes in circumstances between annual tests indicate that it is more likely than not that the asset is impaired. We have identified one reporting unit with goodwill, TRI Pointe Homes, and performed our annual goodwill impairment evaluation as of October 1, 2019. For further details on goodwill, see Note 8, Goodwill and Other Intangible Assets.
For our TRI Pointe Homes reporting unit, we performed a qualitative assessment to determine whether it is more likely than not that its fair value is less than its carrying amount. Upon completion of the October 2019 annual impairment assessment, we determined that no goodwill impairment was indicated. As of December 31, 2019, we are not aware of any significant indicators of impairment that exist for our goodwill that would require additional analysis.
An impairment of our indefinite-lived intangible asset is based on a comparison of its fair value to book value, without consideration of any recoverability due to the indefinite nature of the asset. As of December 31, 2019, we believe that our indefinite-lived intangible asset continues to have an indefinite life and that its fair value exceeds its carrying value. For further details on our indefinite-lived intangible asset, see Note 8, Goodwill and Other Intangible Assets.
In accordance with ASC Topic 360, Property, Plant and Equipment (“ASC 360”), we evaluate finite-lived intangible assets for impairment on an annual basis, or more frequently if events or changes in circumstances between annual tests indicate that it is more likely than not that the asset is impaired. An impairment in the carrying value of our finite-lived intangible asset is recognized whenever anticipated future undiscounted cash flows from the asset become unrecoverable and are estimated to be less than its carrying value. As of December 31, 2019, we believe that the carrying value of our finite-lived intangible asset is recoverable and that its fair value is greater than its carrying value. For further details on our finite-lived intangible asset, see Note 8, Goodwill and Other Intangible Assets.
Significant management judgment is required in the forecasts of future operating results that are used in our impairment evaluations. Our estimates are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur future impairment charges.
Recently Issued Accounting Standards Not Yet Adopted
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, IntangiblesGoodwill 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 consolidated financial statements.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. We have adopted ASU 2016-13 on January 1, 2020 and do not expect the adoption to have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning after December 15, 2020. We do not expect the adoption of ASU 2019-12 to have a material impact on our consolidated financial statements.
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 to January 1, 2019. For further details on the adoption of ASC 842, see Note 13, Commitments and Contingencies.
v3.19.3.a.u2
Segment Information
12 Months Ended
Dec. 31, 2019
Segment Reporting [Abstract]  
Segment Information
Segment Information

We operate two principal businesses: homebuilding and financial services.
Our homebuilding operations consist of six homebuilding companies, each operating under different brand names, through which we 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, brand names, and underlying demand and supply. Based upon these factors, our homebuilding operations comprise 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 early stages of expansion into 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 and escrow services operations, and our TRI Pointe Advantage property and casualty insurance agency operations. For further details, see Note 1, Organization 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 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.
Total revenues and income before income taxes for each of our reportable segments were as follows (in thousands):
 
 
2019
 
2018
 
2017
Revenues
 
 
 
 
 
Maracay
$
272,723

 
$
263,321

 
$
296,768

Pardee Homes
1,101,580

 
999,710

 
826,033

Quadrant Homes
242,174

 
307,706

 
247,939

Trendmaker Homes
413,090

 
310,730

 
253,825

TRI Pointe Homes
796,958

 
1,073,592

 
927,247

Winchester Homes
252,496

 
305,950

 
257,089

Total homebuilding revenues
3,079,021

 
3,261,009

 
2,808,901

Financial services
3,994

 
1,738

 
1,371

Total
$
3,083,015

 
$
3,262,747

 
$
2,810,272

Income (loss) before taxes
 

 
 

 
 

Maracay
$
21,040

 
$
23,281

 
$
23,987

Pardee Homes
198,463

 
191,793

 
198,738

Quadrant Homes
3,951

 
38,366

 
32,671

Trendmaker Homes
17,133

 
25,228

 
16,764

TRI Pointe Homes
49,721

 
115,632

 
89,811

Winchester Homes
11,243

 
23,981

 
15,472

Corporate
(40,887
)
 
(65,889
)
 
(45,091
)
Total homebuilding income before income taxes
260,664

 
352,392

 
332,352

Financial services
10,423

 
9,673

 
7,466

Total
$
271,087

 
$
362,065

 
$
339,818



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

 
 

Maracay
$
338,259

 
$
293,217

Pardee Homes
1,218,384

 
1,286,877

Quadrant Homes
264,437

 
279,486

Trendmaker Homes
268,759

 
271,061

TRI Pointe Homes
737,662

 
812,799

Winchester Homes
237,935

 
272,619

Total
$
3,065,436

 
$
3,216,059

Total assets
 

 
 

Maracay
$
382,262

 
$
318,703

Pardee Homes
1,300,047

 
1,391,503

Quadrant Homes
331,187

 
313,947

Trendmaker Homes
353,610

 
325,943

TRI Pointe Homes
930,348

 
987,610

Winchester Homes
291,456

 
298,602

Corporate
241,357

 
228,010

Total homebuilding assets
3,830,267

 
3,864,318

Financial services
28,423

 
19,885

Total
$
3,858,690

 
$
3,884,203


v3.19.3.a.u2
Earnings Per Share
12 Months Ended
Dec. 31, 2019
Earnings Per Share [Abstract]  
Earnings Per Share
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):
 
 
Year Ended December 31,
 
2019
 
2018
 
2017
Numerator:
 

 
 

 
 

Income available to common stockholders
$
207,187

 
$
269,911

 
$
187,191

Denominator:
 

 
 

 
 

Basic weighted-average shares outstanding
140,851,444

 
148,183,431

 
154,134,411

Effect of dilutive shares:
 
 
 
 
 
Stock options and unvested restricted stock units
542,783

 
821,259

 
950,955

Diluted weighted-average shares outstanding
141,394,227

 
149,004,690

 
155,085,366

Earnings per share
 

 
 

 
 

Basic
$
1.47

 
$
1.82

 
$
1.21

Diluted
$
1.47

 
$
1.81

 
$
1.21

Antidilutive stock options not included in diluted earnings per share
2,636,982

 
1,645,816

 
3,288,340


v3.19.3.a.u2
Receivables, Net
12 Months Ended
Dec. 31, 2019
Receivables [Abstract]  
Receivables, Net
Receivables, Net
Receivables, net consisted of the following (in thousands):
 
December 31, 2019
 
December 31, 2018
Escrow proceeds and other accounts receivable, net
$
29,282

 
$
13,995

Warranty insurance receivable (Note 13)
39,994

 
37,597

Total receivables
$
69,276

 
$
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 $426,000 in 2019 and $667,000 in 2018.
v3.19.3.a.u2
Real Estate Inventories
12 Months Ended
Dec. 31, 2019
Inventory Disclosure [Abstract]  
Real Estate Inventories
Real Estate Inventories  

Real estate inventories consisted of the following (in thousands):
 
December 31, 2019
 
December 31, 2018
Real estate inventories owned:
 

 
 

Homes completed or under construction
$
951,974

 
$
959,911

Land under development
1,641,354

 
1,743,537

Land held for future development
122,847

 
201,874

Model homes
275,204

 
238,828

Total real estate inventories owned
2,991,379

 
3,144,150

Real estate inventories not owned:
 

 
 

Land purchase and land option deposits
74,057

 
71,909

Total real estate inventories not owned
74,057

 
71,909

Total real estate inventories
$
3,065,436

 
$
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. The decrease in land held for future development as of December 31, 2019 compared to December 31, 2018 is attributable to two communities where development activity commenced during the year ended December 31, 2019 and a $7.0 million impairment charge discussed below.
During the fourth quarter of 2018, we acquired a Dallas–Fort Worth-based homebuilder for an all cash purchase price of approximately $61.5 million. This transaction was accounted for as a business combination in accordance with ASC Topic 805, Business Combinations. As a result of this transaction, we recorded approximately $63.2 million of real estate inventories owned, approximately $5.5 million of other assets and approximately $7.2 million of accounts payable and other accrued liabilities. All net assets and operations acquired in this transaction are included in the Trendmaker Homes reporting segment in Note 2, Segment Information.
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):
 
Year Ended December 31,
 
2019
 
2018
 
2017
Interest incurred
$
89,691

 
$
91,631

 
$
84,264

Interest capitalized
(89,691
)
 
(91,631
)
 
(84,264
)
Interest expensed
$

 
$

 
$

Capitalized interest in beginning inventory
$
184,400

 
$
176,348

 
$
157,329

Interest capitalized as a cost of inventory
89,691

 
91,631

 
84,264

Interest previously capitalized as a cost of inventory, included in
   cost of sales
(81,735
)
 
(83,579
)
 
(65,245
)
Capitalized interest in ending inventory
$
192,356

 
$
184,400

 
$
176,348


 
Interest is capitalized to real estate inventory during development and other qualifying activities. Interest that is capitalized to real estate inventory is included in cost of home sales as related units are delivered. Interest that is expensed as incurred is included in other income, net on the consolidated statements of operations.
Real Estate Inventory Impairments and Land Option Abandonments
Real estate inventory impairments and land option abandonments consisted of the following (in thousands):
 
Year Ended December 31,
 
2019
 
2018
 
2017
Real estate inventory impairments
$
10,078

 
$

 
$
854

Land and lot option abandonments and pre-acquisition costs
14,797

 
5,085

 
1,199

Total
$
24,875

 
$
5,085

 
$
2,053


 
During the year ended December 31, 2019, we recorded real estate inventory impairment charges of $10.1 million, of which $7.0 million related to one held for future development community for TRI Pointe Homes in Sacramento, California, and $3.1 million related to three communities for Trendmaker Homes in Houston, Texas. The discount rates used to calculate fair value were 16% for the TRI Pointe Homes community and 10% to 12% for the three Trendmaker Homes communities. We considered both market risk and community specific risk to arrive at a discount rate appropriate for the level of total risk associated with each community.
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 in the consolidated statements of operations.
v3.19.3.a.u2
Investments in Unconsolidated Entities
12 Months Ended
Dec. 31, 2019
Equity Method Investments and Joint Ventures [Abstract]  
Investments in Unconsolidated Entities
Investments in Unconsolidated Entities

As of December 31, 2019, we held equity investments in five 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. Subsequent to December 31, 2019, a reconsideration event under ASC 810 occurred for our financial services limited liability company, which will require us to reassess whether the joint venture is a VIE and, if so, whether the Company is the primary beneficiary. The Company will perform this analysis during the quarter ending March 31, 2020.
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 investment in unconsolidated entities or on our consolidated statement of operations as equity in income (loss) of unconsolidated entities.
Assets and liabilities of unconsolidated entities (in thousands):
 
December 31,
 
2019
 
2018
Assets
 
 
 
Cash
$
8,537

 
$
13,337

Receivables
7,393

 
4,674

Real estate inventories
116,760

 
99,864

Other assets
703

 
811

Total assets
$
133,393

 
$
118,686

Liabilities and equity
 
 
 
Accounts payable and other liabilities
$
11,009

 
$
11,631

Company’s equity
11,745

 
5,410

Outside interests’ equity
110,639

 
101,645

Total liabilities and equity
$
133,393

 
$
118,686


Results of operations from unconsolidated entities (in thousands):
 
 
Year Ended December 31,
 
2019
 
2018
 
2017
Net sales
$
30,691

 
$
28,745

 
$
24,247

Other operating expense
(16,981
)
 
(17,447
)
 
(13,904
)
Other income
175

 
97

 
120

Net income
$
13,885

 
$
11,395

 
$
10,463

Company’s equity in income (loss) of unconsolidated entities
$
9,264

 
$
8,124

 
$
(5,007
)

v3.19.3.a.u2
Variable Interest Entities
12 Months Ended
Dec. 31, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Variable Interest Entities
Variable Interest Entities

In the ordinary course of business, we enter into land option agreements in order to procure land and residential lots for future development and the construction of homes. The use of such land 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 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. Such deposits are recorded as land purchase and land option deposits under real estate inventories not owned in the accompanying consolidated balance sheets.
We analyze each of our land option agreements and other similar contracts under the provisions of ASC 810 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 option agreements have no recourse against us. The maximum exposure to loss under our land option agreements is limited to non-refundable option deposits and any capitalized pre-acquisition costs. In some cases, we have also contracted to complete development work at a fixed cost on behalf of the land owner and budget shortfalls and savings will be borne by us. Additionally, we have entered into land banking arrangements which require us to complete development work even if we terminate the option to procure land or lots.
The following provides a summary of our interests in land option agreements (in thousands):
 
December 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
42,896

 
440,974

 
N/A

 
41,198

 
433,720

 
N/A

Other land option agreements
31,161

 
358,345

 
N/A

 
30,711

 
307,498

 
N/A

Total
$
74,057

 
$
799,319

 
$

 
$
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 option contracts consisted of capitalized pre-acquisition costs of $6.0 million and $7.5 million as of December 31, 2019 and 2018, respectively. These pre-acquisition costs were included in real estate inventories as land under development on our consolidated balance sheets.
v3.19.3.a.u2
Goodwill and Other Intangible Assets
12 Months Ended
Dec. 31, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
The Company recorded $139.3 million of goodwill in connection with the Merger with Weyerhaeuser Real Estate Company (WRECO). As of December 31, 2019 and 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 December 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 WRECO in 2014, which has an indefinite useful life.
Goodwill and other intangible assets consisted of the following (in thousands):
 
December 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

 
(7,390
)
 
20,589

 
27,979

 
(6,856
)
 
21,123

Total
$
167,283

 
$
(7,390
)
 
$
159,893

 
$
167,283

 
$
(6,856
)
 
$
160,427


 
The remaining useful life of our amortizing intangible asset related to Maracay was 6.2 and 7.2 years as of December 31, 2019 and 2018, respectively. Amortization expense related to this intangible asset was $534,000 for each of the years ended December 31, 2019 and 2018, and was charged to sales and marketing expense.  Our $17.3 million indefinite life intangible
asset related to 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 next five years and thereafter is (in thousands):
2020
$
534

2021
534

2022
534

2023
534

2024
534

Thereafter
619

Total
$
3,289


v3.19.3.a.u2
Other Assets
12 Months Ended
Dec. 31, 2019
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]  
Other Assets
Other Assets
Other assets consisted of the following (in thousands):
 
December 31, 2019
 
December 31, 2018
Prepaid expenses
$
24,070

 
$
31,983

Refundable fees and other deposits
30,242

 
12,376

Development rights, held for future use or sale
2,213

 
845

Deferred loan costs
4,345

 
2,424

Operating properties and equipment, net
57,803

 
54,198

Lease right-of-use assets
50,947

 

Other
3,805

 
3,425

Total
$
173,425

 
$
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 and Note 13, Commitments and Contingencies.
v3.19.3.a.u2
Accrued Expenses and Other Liabilities
12 Months Ended
Dec. 31, 2019
Payables and Accruals [Abstract]  
Accrued Expenses and Other Liabilities
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
 
December 31, 2019
 
December 31, 2018
Accrued payroll and related costs
$
42,798

 
$
44,010

Warranty reserves (Note 13)
76,607

 
71,836

Estimated cost for completion of real estate inventories
90,899

 
114,928

Customer deposits
20,390

 
17,464

Income tax liability to Weyerhaeuser
346

 
6,577

Accrued income taxes payable
1,530

 
8,335

Liability for uncertain tax positions
486

 
972

Accrued interest
11,952

 
12,572

Other tax liabilities
8,448

 
21,892

Lease liabilities
56,125

 

Other
12,462

 
36,563

Total
$
322,043

 
$
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 and Note 13, Commitments and Contingencies.
v3.19.3.a.u2
Senior Notes and Loans Payable
12 Months Ended
Dec. 31, 2019
Debt Disclosure [Abstract]  
Senior Notes and Loans Payable
Senior Notes and Loans Payable
Senior Notes
Senior notes consisted of the following (in thousands): 
 
December 31,
2019
 
December 31,
2018
4.375% Senior Notes due June 15, 2019
$

 
$
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
(16,015
)
 
(21,091
)
Total
$
1,033,985

 
$
1,410,804


In June 2017, TRI Pointe Group issued $300.0 million aggregate principal amount of 5.250% Senior Notes due 2027 (the “2027 Notes”) at 100.00% of their aggregate principal amount. Net proceeds of this issuance were $296.3 million, after debt issuance costs and discounts. The 2027 Notes mature on June 1, 2027 and interest is paid semiannually in arrears on June 1 and December 1 of each year until maturity.
In May 2016, TRI Pointe Group issued $300.0 million aggregate principal amount of 4.875% Senior Notes due 2021 (the “2021 Notes”) at 99.44% of their aggregate principal amount. Net proceeds of this issuance were $293.9 million, after debt issuance costs and discounts. The 2021 Notes mature on July 1, 2021 and interest is paid semiannually in arrears on January 1 and July 1.
TRI Pointe Group and its 100% owned subsidiary TRI Pointe Homes, Inc. (“TRI Pointe Homes”) are co-issuers of the 5.875% Senior Notes due 2024 (the “2024 Notes”) and the 4.375% Senior Notes that matured on June 15, 2019 (the “2019 Notes”). The 2024 Notes were issued at 98.15% of their aggregate principal amount. The net proceeds from the offering were $861.3 million, after debt issuance costs and discounts. The 2024 Notes mature on June 15, 2024, with interest payable semiannually in arrears on June 15 and December 15.
As of December 31, 2019 there was $11.1 million of capitalized debt financing costs, included in senior notes, net on our consolidated balance sheet, that will amortize over the lives of the Senior Notes. Accrued interest related to the Senior Notes was $9.8 million and $11.5 million as of December 31, 2019 and 2018, respectively.
Loans Payable
The Company’s outstanding loans payable consisted of the following (in thousands):
 
December 31,
2019
 
December 31,
2018
Term loan facility
$
250,000

 
$

Unsecured revolving credit facility

 

Total
$
250,000

 
$


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, which allowed us to draw the full $250 million from the Term Facility in June 2019 in connection with the maturity of the 2019 Notes. We may increase the Credit Facility to not more than $1 billion in the aggregate, at our request, upon satisfaction of specified conditions. The Revolving Facility contains a sublimit of $75 million for letters of credit. We may borrow under the Revolving Facility in the ordinary course of business to repay senior notes and fund our operations, including our 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 our 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.
We had no outstanding debt under the Revolving Facility as of December 31, 2019 and 2018. As of December 31, 2019, we had $250 million outstanding debt under the Term Facility with an interest rate of 3.29%. As of December 31, 2019 and 2018, there was $4.3 million and $2.4 million, of capitalized debt financing costs. These costs related to the Credit Facility will amortize over the remaining term of the Credit Facility and are included in other assets on our consolidated balance sheets.  Accrued interest, including loan commitment fees, related to the Credit Facility was $1.2 million and $402,000 as of December 31, 2019 and December 31, 2018, respectively.
At December 31, 2019 and 2018, we had outstanding letters of credit of $32.6 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 years ended December 31, 2019 and 2018, the Company incurred interest of $89.7 million and $91.6 million, respectively, related to all notes payable and Senior Notes outstanding during the period. All interest incurred was capitalized to inventory for the years ended December 31, 2019 and 2018, respectively. Included in interest incurred was amortization of deferred financing and Senior Notes discount costs of $6.3 million and $8.0 million for the years ended December 31, 2019 and 2018, respectively.  Accrued interest related to all outstanding debt at December 31, 2019 and 2018 was $12.0 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 but not limited to (i) a minimum consolidated tangible net worth; (ii) a maximum total leverage ratio; and (iii) a minimum interest coverage ratio. The Company was in compliance with all applicable financial covenants as of December 31, 2019 and December 31, 2018.
v3.19.3.a.u2
Fair Value Disclosures
12 Months Ended
Dec. 31, 2019
Fair Value Disclosures [Abstract]  
Fair Value Disclosures
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 December 31, 2019 and 2018, related to our financial instruments, measured at fair value on a recurring basis, is set forth below (in thousands):
 
 
 
December 31, 2019
 
December 31, 2018
 
Hierarchy
 
Book Value
 
Fair Value
 
Book Value
 
Fair Value
Senior Notes (1)
Level 2
 
$
1,045,072

 
$
1,104,750

 
$
1,425,397

 
$
1,308,826

Term loan (2)
Level 2
 
$
250,000

 
$
250,000

 
$

 
$

   __________
(1) 
The book value of the Senior Notes is net of discounts, excluding deferred loan costs of $11.1 million and $14.6 million as of December 31, 2019 and 2018, respectively. The estimated fair value of our Senior Notes at December 31, 2019 and 2018 is based on quoted market prices.
(2) 
The estimated fair value of the Term Loan Facility as of December 31, 2019 approximated book value due to the variable interest rate terms of these loans.
At December 31, 2019 and 2018, the carrying value of cash and cash equivalents, receivables, other assets, accounts payable and accrued expenses and other liabilities approximated fair value due to their short-term nature and variable interest rate terms.

Fair Value of Nonfinancial Assets
Nonfinancial assets include items such as real estate inventories and long-lived assets that are measured at fair value on a nonrecurring basis with events and circumstances indicating the carrying value is not recoverable. The following table presents impairment charges and the remaining net fair value for nonfinancial assets that were measured during the periods presented (in thousands):
 
 
 
Year Ended December 31, 2019
 
Year Ended December 31, 2018
 
Hierarchy
 
Impairment
Charge
 
Fair Value
Net of
Impairment
 
Impairment
Charge
 
Fair Value
Net of
Impairment
Real estate inventories (1)
Level 3
 
$
10,078

 
$
9,735

 
$

 
$

 
(1) 
Fair value of real estate inventories, net of impairment charges represents only those assets whose carrying values were adjusted to fair value in the respective periods presented.  
The impairment charges recorded during the year ended December 31, 2019 relate to four communities where the carrying value of each community exceeded the fair value based on a discounted cash flow analysis. For further details, see Note 5, Real Estate Inventories.
v3.19.3.a.u2
Commitments and Contingencies
12 Months Ended
Dec. 31, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
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 a $419,000 legal reserve as of December 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 1989, included in accrued expenses and other liabilities on our consolidated balance sheet. 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.
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 $40.0 million and $37.6 million as of December 31, 2019 and 2018, respectively. Warranty insurance receivables are recorded in receivables on the accompanying consolidated balance sheet.
Warranty reserves consisted of the following (in thousands):
 
Year Ended December 31,
 
2019
 
2018
 
2017
Warranty reserves, beginning of period
$
71,836

 
$
69,373

 
$
83,135

Warranty reserves accrued
27,537

 
25,340

 
13,336

Adjustments to pre-existing reserves
(427
)
 
(4,286
)
 
(9,354
)
Warranty expenditures
(22,339
)
 
(18,591
)
 
(17,744
)
Warranty reserves, end of period
$
76,607

 
$
71,836

 
$
69,373



Performance Bonds
We obtain surety bonds in the normal course of business with various municipalities and other government agencies to secure completion of certain infrastructure improvements of our projects.  As of December 31, 2019 and December 31, 2018, the Company had outstanding surety bonds totaling $611.6 million and $685.7 million, respectively. As of December 31, 2019 and December 31, 2018, our estimated cost to complete obligations related to these surety bonds was $382.3 million and $423.4 million, respectively. If any such performance bonds or letters of credit are called, we would be obligated to reimburse the issuer of the performance bond or letter of credit. We do not believe that a material amount of any currently outstanding performance bonds or letters of credit will be called.  Performance bonds do not have stated expiration dates. Rather, we are released from the performance bonds as the underlying performance is completed.
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 subsequent to January 1, 2019. 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. For the years ended December 31, 2019, 2018 and 2017, lease expense was $9.2 million, $7.9 million and $7.0 million, respectively.  Rental expense is included in general and administrative expenses on the consolidated statements of operations.
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 to extend 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):

 
Year Ended December 31, 2019
Lease Cost
 
Operating lease cost (included in SG&A expense)
$
9,228

Ground lease cost (included in other operations expense)
2,434

Sublease income, ground leases (included in other operations revenue)
(2,470
)
Net lease cost
$
9,192

 
 
Other information
 
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating lease cash flows (included in operating cash flows)
$
6,513

Ground lease cash flows (included in operating cash flows)
$
2,434

Right-of-use assets obtained in exchange for new operating lease liabilities
$
2,473

 
December 31, 2019
Weighted-average discount rate:
 
Operating leases
5.9
%
Ground leases
10.2
%
Weighted-average remaining lease term (in years):
 
Operating leases
6.1

Ground leases
48.1


The future minimum lease payments under our operating leases are as follows (in thousands):
 
Property, Equipment and Other Leases
 
Ground Leases (1)
2020
$
8,592

 
$
2,984

2021
7,192

 
2,984

2022
5,598

 
2,984

2023
4,492

 
2,984

2024
2,768

 
2,984

Thereafter
6,403

 
81,282

Total operating lease payments
$
35,045

 
$
96,202

Less: Interest
5,804

 
69,318

Present value of operating lease liabilities
$
29,241

 
$
26,884

(1)     Ground leases are fully subleased through 2041, representing $65.2 million of the $96.2 million future ground lease obligations.
Purchase Obligations
In the ordinary course of business, we enter into land option 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 December 31, 2019, we had $74.1 million of non-refundable cash deposits pertaining to land option contracts and purchase contracts with an aggregate remaining purchase price of approximately $799.3 million (net of deposits).
Our utilization of land 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 option takedown arrangements, the availability of capital to financial intermediaries to finance the development of optioned 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.
v3.19.3.a.u2
Stock-Based Compensation
12 Months Ended
Dec. 31, 2019
Share-based Payment Arrangement [Abstract]  
Stock-Based Compensation
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, amended with the approval of our stockholders in 2014 and 2015, and amended and restated in 2019. 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. On February 21, 2019, our board of directors approved an amendment and restatement of the 2013 Incentive Plan. The 2013 Incentive Plan provides for the grant of equity-based awards, including options to purchase shares of common stock, stock appreciation rights, bonus stock, restricted stock, restricted stock units and performance awards. The 2013 Incentive Plan will automatically expire on the tenth anniversary of its effective date. Our board of directors may terminate or amend the 2013 Incentive Plan at any time, subject to any requirement of stockholder approval required by applicable law, rule or regulation.
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 December 31, 2019 there were 5,847,900 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):
 
Year Ended December 31,
 
2019
 
2018
 
2017
Total stock-based compensation
$
14,806

 
$
14,814

 
$
15,906


 
Stock-based compensation is charged to general and administrative expense on the accompanying consolidated statements of operations. As of December 31, 2019, total unrecognized stock-based compensation related to all stock-based awards was $16.6 million and the weighted average term over which the expense was expected to be recognized was 1.7 years.
Summary of Stock Option Activity
The following table presents a summary of stock option awards for the year ended December 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
(58,937
)
 
$
7.84

 
 
 
 
Forfeited
(3,625
)
 
$
14.29

 
 
 
 
Options outstanding at December 31, 2019
891,343

 
$
15.03

 
3.4

 
$
994

Options exercisable at December 31, 2019
891,343

 
$
15.03

 
3.4

 
$
994


 
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. The total intrinsic value of stock option awards exercised during the years ended December 31, 2019, 2018 and 2017 was $354,000, $873,000, and $4.5 million, respectively. There were no stock option awards granted during the years ended December 31, 2019, 2018 and 2017.

Summary of Restricted Stock Unit Activity
The following table presents a summary of restricted stock units (“RSUs”) for the year ended December 31, 2019:
 
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
1,656,333

 
$
12.15

 


Vested
(844,734
)
 
$
12.95

 
 
Forfeited
(769,096
)
 
$
5.45

 
 
Nonvested RSUs at December 31, 2019
3,384,351

 
$
12.39

 
$
52,694



The total intrinsic value of restricted stock units that vested during the years ended December 31, 2019, 2018 and 2017 was $10.9 million, $17.8 million, and $8.8 million, respectively. The total grant date fair value of restricted stock awards granted during the years ended December 31, 2019, 2018 and 2017 were $20.1 million, $17.8 million, and $18.4 million, respectively.

On May 6, 2019, the Company granted an aggregate of 61,488 time-based RSUs to the non-employee members of its board of directors and 1,098 time-based RSUs to certain employees. The RSUs granted to non-employee directors vest in their entirety on the day immediately prior to the Company’s 2020 Annual Meeting of Stockholders and the RSUs granted to employees 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 6, 2019 was measured using a price of $13.66 per share, 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 March 11, 2019 and February 28, 2019, the Company granted an aggregate of 3,025 and 990,723, respectively, of time-based 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 were the closing stock prices on the dates 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.

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 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 vested 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 February 22, 2018, the Company granted 184,179177,095, and 85,005 performance-based RSUs to the Company’s Chief Executive Officer, President, and Chief Financial Officer, respectively. These performance-based RSUs are allocated in equal parts to two separate performance metrics: (i) TSR, with vesting based on the Company’s TSR relative to its peer-group homebuilders; and (ii) earnings per share. The vesting, if at all, of these performance-based RSUs may range from 0% to 100% and will be based on the Company’s percentage attainment of specified threshold, target and maximum performance goals. The performance period for these performance-based RSUs is January 1, 2018 to December 31, 2020. The fair value of the performance-based RSUs related to the TSR metric was determined to be $10.97 per share based on a Monte Carlo simulation. The fair value of the performance-based RSUs related to the earnings per share goal was measured using a price of $16.94 per share, which was the closing stock price on the date of grant. Each award will be expensed over the requisite service period.

On February 15, 2018, the Compensation Committee of our Board of Directors certified the performance achieved with respect to performance-based RSUs granted to the Company’s Chief Executive Officer, President, and Chief Financial Officer in 2015 that resulted in the issuance of 197,898 shares of our common stock under the 2013 Incentive Plan. The vesting of these performance-based RSUs is included in the table above. RSUs that were forfeited, as reflected in the table above, during the year ended December 31, 2018 included performance-based RSUs and time-based RSUs that were forfeited for no consideration.

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 common stock issued will differ.
v3.19.3.a.u2
Income Taxes
12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes  
The provision for income tax attributable to income before income taxes consisted of (in thousands):
 
Year Ended December 31,
 
2019
 
2018
 
2017
Current:
 

 
 
 
 

Federal
$
38,782

 
$
70,098

 
$
95,814

State
7,253

 
10,941

 
8,961

Total current taxes
46,035

 
81,039

 
104,775

Deferred:
 

 
 

 
 

Federal
9,698

 
(350
)
 
37,151

State
8,167

 
9,863

 
10,341

Total deferred taxes
17,865

 
9,513

 
47,492

Total income tax expense
$
63,900

 
$
90,552

 
$
152,267


 
The Company’s provision for income taxes was different from the amount computed by applying the statutory federal income tax rate of 21% to the underlying income before income taxes as a result of the following (in thousands):
 
Year Ended December 31,
 
2019
 
2018
 
2017
Taxes at the U.S. federal statutory rate
$
56,935

 
$
76,009

 
$
118,936

State income taxes, net of federal tax impact
10,221

 
13,603

 
10,712

Domestic production activities deduction

 

 
(7,108
)
Non-deductible transaction costs
145

 
234

 
541

Change in valuation allowance
(3
)
 

 
3,256

Tax Cuts and Jobs Act

 
(740
)
 
21,961

Federal energy credits
(6,873
)
 

 

Other, net
3,475

 
1,446

 
3,969

Total income tax expense
$
63,900

 
$
90,552

 
$
152,267

Effective income tax rate
23.6
%
 
25.0
%
 
44.8
%


Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax basis, and for operating loss and tax credit carryforwards. Deferred taxes consisted of the following at December 31, 2019 and 2018 (in thousands):
 
Year Ended
December 31,
 
2019
 
2018
Deferred tax assets:
 
 
 

Impairment and other valuation reserves
$
31,781

 
$
37,573

Incentive compensation
5,818

 
5,946

Indirect costs capitalized
21,160

 
20,348

Operating lease liability
14,210

 

Net operating loss carryforwards (state)
13,254

 
18,702

State taxes
1,315

 
2,275