Form 10-Q Shea Homes Limited Partnership

10-Q - Quarterly report [Sections 13 or 15(d)]

Published: 2012-08-10 11:06:44
Submitted: 2012-08-10
Period Ending In: 2012-06-30
d366196d10q.htm FORM 10-Q


ENT> 10-Q 1 d366196d10q.htm FORM 10-Q

Form 10-Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

 

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 333-177328

 

 

SHEA HOMES LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

 

 

 

California
 
95-4240219

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

655 Brea Canyon Road, Walnut, CA
 
91789
(Address of principal executive offices)
 
(Zip Code)

(909) 594-9500

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such

files).    Yes  
x
    No  
¨

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

 

Large accelerated filer
 
¨
  
Accelerated filer
 
¨
Non-accelerated filer
 
x
  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨

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

 

 

 


Table of Contents

SHEA HOMES LIMITED PARTNERSHIP

FORM 10-Q

INDEX

 

 
 
 
  
Page No.
 

PART 1.

 
  
 
  
 

  
 
1
  
 

  
 
2
  
 

  
 
3
  
 

  
 
4
  
 

  
 
5
  
 
  
 
30
  
 
  
 
47
  
 
  
 
47
  

PART 2.

 
  
 
  
 
49
  
 
  
 
49
  
 
  
 
61
  
 
  
 
62
  

  
 
63
  

 

1


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1.
FINANCIAL STATEMENTS

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Balance Sheets

(In thousands)

 

 
  
June 30,
2012
 
  
December 31,
2011
 
 
  
(unaudited)
 
  
 
 

Assets

  
  

Cash and cash equivalents

  
$
240,937
  
  
$
268,366
  

Restricted cash

  
 
13,859
  
  
 
13,718
  

Investments

  
 
29,025
  
  
 
32,428
  

Accounts and other receivables, net

  
 
127,488
  
  
 
120,689
  

Receivables from related parties, net

  
 
33,462
  
  
 
60,223
  

Inventory

  
 
794,761
  
  
 
783,810
  

Investments in joint ventures

  
 
18,032
  
  
 
17,870
  

Property and equipment, net

  
 
1,953
  
  
 
1,992
  

Other assets, net

  
 
26,425
  
  
 
29,020
  
  

 

 

    

 

 

 

Total assets

  
$
1,285,942
  
  
$
1,328,116
  
  

 

 

    

 

 

 

Liabilities and equity

  
  

Liabilities:

  
  

Notes payable

  
$
751,700
  
  
$
752,056
  

Payables to related parties

  
 
4,326
  
  
 
2,343
  

Accounts payable

  
 
35,751
  
  
 
46,063
  

Other liabilities

  
 
216,096
  
  
 
199,651
  
  

 

 

    

 

 

 

Total liabilities

  
 
1,007,873
  
  
 
1,000,113
  

Equity:

  
  

SHLP equity:

  
  

Owners’ equity

  
 
270,419
  
  
 
294,511
  

Accumulated other comprehensive income

  
 
7,194
  
  
 
6,392
  
  

 

 

    

 

 

 

Total SHLP equity

  
 
277,613
  
  
 
300,903
  

Non-controlling interests

  
 
456
  
  
 
27,100
  
  

 

 

    

 

 

 

Total equity

  
 
278,069
  
  
 
328,003
  
  

 

 

    

 

 

 

Total liabilities and equity

  
$
1,285,942
  
  
$
1,328,116
  
  

 

 

    

 

 

 

See accompanying notes

 

1


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands)

 

 
  
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
  
2012
 
 
2011
 
 
2012
 
 
2011
 
 
  
(unaudited)
 

Revenues

  
$
132,468
  
 
$
114,934
  
 
$
238,071
  
 
$
188,993
  

Cost of sales

  
 
(107,978
 
 
(104,856
 
 
(193,013
 
 
(168,302
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  
 
24,490
  
 
 
10,078
  
 
 
45,058
  
 
 
20,691
  

Selling expenses

  
 
(10,199
 
 
(11,170
 
 
(19,551
 
 
(19,388

General and administrative expenses

  
 
(11,573
 
 
(8,265
 
 
(19,824
 
 
(16,488

Equity in income (loss) from joint ventures, net

  
 
317
  
 
 
(102
 
 
384
  
 
 
(495

Loss on debt extinguishment

  
 
0
  
 
 
(88,384
 
 
0
  
 
 
(88,384

Interest expense

  
 
(5,909
 
 
(4,375
 
 
(12,197
 
 
(8,326

Other (expense) income, net

  
 
(8,398
 
 
786
  
 
 
(6,092
 
 
2,417
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

  
 
(11,272
 
 
(101,432
 
 
(12,222
 
 
(109,973

Income tax (expense) benefit

  
 
(848
 
 
676
  
 
 
(96
 
 
1,017
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  
 
(12,120
 
 
(100,756
 
 
(12,318
 
 
(108,956

Less: Net (income) loss attributable to non-controlling interests

  
 
19
  
 
 
(349
 
 
(194
 
 
(438
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to SHLP

  
$
(12,101
 
$
(101,105
 
$
(12,512
 
$
(109,394
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

  
$
(12,761
 
$
(99,485
 
$
(11,516
 
$
(107,005
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

2


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Changes in Equity

(In thousands)

 

 
 
Shea Homes Limited Partnership
 
 
Non-
controlling
Interests
 
 
Total
Equity
 
 
 
Limited Partner
 
 
General
Partner
 
 
Total
Owners’
Equity
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
Total
SHLP
Equity
 
 
 
 
 
Common
 
 
Preferred
Series B
 
 
Preferred
Series D
 
 
Common
 
 
 
 
 
 

Balance, December 31, 2010

 
$
71,830
  
 
$
194,240
  
 
$
121,892
  
 
$
18,901
  
 
$
406,863
  
 
$
5,363
  
 
$
412,226
  
 
$
20,087
  
 
$
432,313
  

Comprehensive (loss) income:

 
 
 
 
 
 
 
 
 

Net (loss) income

 
 
(71,798
 
 
(17,787
 
 
(916
 
 
(18,893
 
 
(109,394
 
 
0
  
 
 
(109,394
 
 
438
  
 
 
(108,956

Change in unrealized gains on investments, net

 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
1,951
  
 
 
1,951
  
 
 
0
  
 
 
1,951
  
             

 

 

   

 

 

   

 

 

 

Total comprehensive (loss) income

 
 
 
 
 
 
 
 
(107,443
 
 
438
  
 
 
(107,005

Contributions from non-controlling interests

 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
3,918
  
 
 
3,918
  

Distributions to non-controlling interests

 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
(90
 
 
(90
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2011 (unaudited)

 
$
32
  
 
$
176,453
  
 
$
120,976
  
 
$
8
  
 
$
297,469
  
 
$
7,314
  
 
$
304,783
  
 
$
24,353
  
 
$
329,136
  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

 
$
1
  
 
$
173,555
  
 
$
120,955
  
 
$
0
  
 
$
294,511
  
 
$
6,392
  
 
$
300,903
  
 
$
27,100
  
 
$
328,003
  

Comprehensive (loss) income:

 
 
 
 
 
 
 
 
 

Net (loss) income

 
 
0
  
 
 
(12,512
 
 
0
  
 
 
0
  
 
 
(12,512
 
 
0
  
 
 
(12,512
 
 
194
  
 
 
(12,318

Change in unrealized gains on investments, net

 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
802
  
 
 
802
  
 
 
0
  
 
 
802
  
             

 

 

   

 

 

   

 

 

 

Total comprehensive (loss) income

 
 
 
 
 
 
 
 
(11,710
 
 
194
  
 
 
(11,516

Redemption of Company’s interest in consolidated joint venture (see Note 13)

 
 
0
  
 
 
(11,580
 
 
0
  
 
 
0
  
 
 
(11,580
 
 
0
  
 
 
(11,580
 
 
(28,239
 
 
(39,819

Contributions from non-controlling interests

 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
1,746
  
 
 
1,746
  

Distributions to non-controlling interests

 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
(345
 
 
(345
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012 (unaudited)

 
$
1
  
 
$
149,463
  
 
$
120,955
  
 
$
0
  
 
$
270,419
  
 
$
7,194
  
 
$
277,613
  
 
$
456
  
 
$
278,069
  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

3


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Cash Flows

(In thousands)

 

 
  
Six Months Ended
June 30,
 
 
  
2012
 
 
2011
 
 
  
(unaudited)
 
 
(unaudited)
 

Operating activities

  
 

Net loss

  
$
(12,318
 
$
(108,956

Adjustments to reconcile net loss to net cash used in operating activities:

  
 

Equity in (income) loss from joint ventures

  
 
(384
 
 
495
  

Loss from debt extinguishment

  
 
0
  
 
 
88,384
  

Net gain on sale of available-for-sale investments

  
 
(22
 
 
(409

Depreciation and amortization expense

  
 
3,321
  
 
 
4,489
  

Impairment of inventory

  
 
0
  
 
 
10,302
  

Net interest capitalized on investment in joint ventures

  
 
(378
 
 
(144

Distributions of earnings from joint ventures

  
 
1,000
  
 
 
0
  

Changes in operating assets and liabilities:

  
 

Restricted cash

  
 
(141
 
 
(1,569

Receivables and other assets

  
 
(4,772
 
 
(4,863

Inventory

  
 
(28,542
 
 
(48,224

Payables and other liabilities

  
 
8,606
  
 
 
15,987
  
  

 

 

   

 

 

 

Net cash used in operating activities

  
 
(33,630
 
 
(44,508

Investing activities

  
 

Proceeds from sale of available-for-sale investments

  
 
5,212
  
 
 
895
  

Net proceeds from promissory notes from related parties

  
 
1,843
  
 
 
101,741
  

Investments in joint ventures

  
 
(1,183
 
 
(15,800

Distributions from joint ventures

  
 
223
  
 
 
6,989
  

Other investing activities

  
 
(74
 
 
14
  
  

 

 

   

 

 

 

Net cash provided by investing activities

  
 
6,021
  
 
 
93,839
  

Financing activities

  
 

Repayments on revolving lines of credit

  
 
0
  
 
 
(80,448

Borrowings from financial institutions

  
 
0
  
 
 
750,000
  

Principal payments to financial institutions and others

  
 
(1,053
 
 
(720,835

Accrued interest on notes payable

  
 
0
  
 
 
1,839
  

Amortization of notes payable discount

  
 
0
  
 
 
5,527
  

Contributions from non-controlling interests

  
 
1,746
  
 
 
3,918
  

Distributions to non-controlling interests

  
 
(345
 
 
(90

Cash retained by non-controlling interests for the redemption of the Company’s interest in consolidated joint venture

  
 
(168
 
 
0
  
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  
 
180
  
 
 
(40,089
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

  
 
(27,429
 
 
9,242
  

Cash and cash equivalents at beginning of period

  
 
268,366
  
 
 
166,874
  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

  
$
240,937
  
 
$
176,116
  
  

 

 

   

 

 

 

See accompanying notes

 

4


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2012

1. Basis of Presentation

The accompanying unaudited, condensed consolidated financial statements include the accounts of Shea Homes Limited Partnership (“SHLP”) and its wholly-owned subsidiaries, including Shea Homes, Inc. (“SHI”) and its wholly-owned subsidiaries. The Company consolidates all joint ventures in which it has a controlling interest or other ventures in which it is the primary beneficiary of a variable interest entity (“VIE”). Material intercompany accounts and transactions are eliminated. The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all information and notes required by GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended December 31, 2011, which are contained in the Company’s prospectus filed with the Securities and Exchange Commission (“SEC”) on April 6, 2012 (the “Prospectus”) pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”). Adjustments, consisting of normal, recurring accruals, loss reserves and deferred tax asset valuation allowance adjustments, considered necessary for a fair presentation, are included.

Effective January 1, 2012, the Company adopted Accounting Standards Update (“ASU”) 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which requires presentation of comprehensive income in either (1) a continuous statement of operations and comprehensive income or (2) two separate but consecutive statements. In accordance with ASU 2011-05, the 2011 financial statements have been restated to conform to the current year presentation of comprehensive income (loss).

Unless the context otherwise requires, the terms “we”, “us”, “our” and “the Company” refer to SHLP, its subsidiaries and its consolidated joint ventures.

Organization

SHLP, a California limited partnership, was formed January 4, 1989, pursuant to an agreement of partnership (the “Agreement”), as most recently amended January 1, 2009, by and between J.F. Shea, LP, a Delaware limited partnership, as general partner, and the Company’s limited partners who are comprised of entities and trusts, including J.F. Shea Co., Inc. (“JFSCI”), that are under the common control of Shea family members (collectively, the “Partners”). J.F. Shea, LP is 96% owned by JFSCI.

Nature of Operations

Our principal business purpose is homebuilding, which includes acquiring and developing land and constructing and selling residential homes thereon. Our principal markets are California, Arizona, Colorado, Washington, Nevada and Florida.

We own a captive insurance company, Partners Insurance Company, Inc. (“PIC”), which provided warranty, general liability, workers’ compensation and completed operations insurance for related companies and third-party subcontractors. Effective for the policy years commencing in 2007, PIC ceased issuing policies for these coverages. Thereafter, our warranty coverage became self-insured, and the general liability, workers’ compensation and completed operations coverages (through July 31, 2009) were insured by an affiliate insurance carrier for primary coverage and by third-party insurance carriers for excess coverage. In February 2011, we purchased completed operations insurance from affiliate insurance carriers, retroactive to August 1, 2009.

Seasonality

Historically, the homebuilding industry experiences seasonal fluctuations. We typically experience the highest new home sales order activity in spring and summer, although this activity is also highly dependent on the number of active selling communities, timing of new community openings and other market factors. Since it typically takes three to eight months to construct a new home, we deliver more homes in the second half of the year as spring and summer home sales orders convert to home deliveries. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest from April to October, and the majority of cash receipts from home closings occur during the second half of the year. Therefore, operating results for the three and six months ended June 30, 2012 are not necessarily indicative of results expected for the year ended December 31, 2012.

Further, in contrast to this historical seasonal pattern, weakness in homebuilding market conditions since 2006 has distorted our results. Although we may experience our seasonal pattern in the future, given current market conditions, we make no assurances as to when or whether this pattern will recur.

 

5


Table of Contents

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates.

2. Summary of Significant Accounting Policies

Inventory

Inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is written down to fair value. Quarterly, we review our real estate assets at each community for indicators of impairment. Real estate assets include projects actively selling and projects under development or held for future development. Indicators of impairment include, but not limited to, significant decreases in local housing market values and selling prices of comparable homes, significant decreases in gross margins and sales absorption rates, costs in excess of budget, and actual or projected cash flow losses.

Semi-annually, or if there are indications of impairment, we analyze the budgets and cash flows of our real estate assets and compare the estimated remaining undiscounted future cash flows of the community to the asset’s carrying value. If the undiscounted cash flows exceed the asset’s carrying value, no impairment adjustment is required. 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 use of estimates and assumptions regarding future conditions, including timing and amounts of development costs and sales prices of real estate assets, to determine if estimated future undiscounted cash flows will be sufficient to recover the asset’s carrying value.

When estimating undiscounted cash flows of a community, various assumptions are made, 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 and marketing 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 sales absorption rates has a direct impact on the estimated per unit sales price of a home, the level of time sensitive costs (such as indirect construction, overhead and carrying costs), and selling and marketing costs (such as model maintenance costs and advertising 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 by community over time.

If assets are considered impaired, impairment 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 or other valuation techniques. 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. The discount rate used in determining each asset’s fair value depends on the community’s projected life and development stage, subject to perceived risks associated with the community’s cash flow streams relative to its inventory.

Completed Operations Claim Costs

We maintain, and require our subcontractors to maintain, general liability insurance which includes coverage for completed operations losses and damages. Most subcontractors carry this insurance through our “rolling wrap-up” insurance program, where our risks and risks of participating subcontractors working on our projects are insured through master policies.

Completed operations claims reserves primarily represent claims for property damage to completed homes and projects outside of our one-to-two year warranty period. Specific terms and conditions of completed operations warranties vary depending on the market in which homes are closed and can range to 12 years.

We record expenses and liabilities for estimated costs of potential completed operations claims based upon aggregated loss experience, which includes an estimate of completed operations claims incurred but not reported and is actuarially estimated using individual case-basis valuations and statistical analysis. These estimates make up our entire reserve and are subject to a high degree of variability due to uncertainties such as trends in completed operations claims related to our markets and products built, changes in claims reporting and settlement patterns, third party recoveries, insurance industry practices, insurance regulations and legal precedent. Because state regulations vary, completed operations claims are reported and resolved over an extended period, sometimes exceeding 12 years. As a result, actual costs may differ significantly from estimates.

 

6


Table of Contents

The actuarial analyses that determine these incurred but not reported claims consider various factors, including frequency and severity of losses, which are based on our historical claims experience supplemented by industry data. The actuarial analyses of these claims and reserves also consider historical third party recovery rates and claims management expenses. Due to inherent uncertainties related to each of these factors, periodic changes to such factors based on updated relevant information could result in actual costs to differ significantly from estimated costs.

In accordance with our underlying completed operations insurance policies, these completed operations claims costs are recoverable from our subcontractors or insurance carriers. Completed operations claims through July 31, 2009 are insured with third-party insurance carriers and completed operations claims commencing August 1, 2009 are insured with affiliate insurance carriers.

Revenues

In accordance with Accounting Standards Codification (“ASC”) 360, revenues from housing and other real estate sales are recognized when the respective units are closed. Housing and other real estate sales are closed when all conditions of escrow are met, including delivery of the home or other real estate asset, title passage, appropriate consideration is received and collection of associated receivables, if any, is reasonably assured. Sales incentives are a reduction of revenues when the respective unit is closed.

Income Taxes

SHLP is treated as a partnership for income tax purposes. As a limited partnership, SHLP is subject to certain minimal state taxes and fees; however, taxes on income or losses realized by SHLP are generally the obligation of the Partners and their owners.

SHI and PIC are C corporations. Federal and state income taxes are provided for these entities in accordance with ASC 740. The provision for, or benefit from, income taxes is calculated using the asset and liability method, whereby deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect the year in which differences are expected to reverse. Deferred tax assets are evaluated to determine whether a valuation allowance should be established based on its determination of whether it is more likely than not some or all of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends primarily on generation of future taxable income during periods in which those temporary differences become deductible. Judgment is required to determine future tax consequences of events that have been recognized in the consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on the consolidated financial position or results of operations.

New Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, (“ASU 2011-04”). ASU 2011-04 amends ASC 820, Fair Value Measurements (“ASC 820”), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies application of existing fair value measurement and expands the ASC 820 disclosure requirements, particularly for Level 3 fair value measurements. The Company adopted ASU 2011-04 effective January 1, 2012, which did not have a material impact on its consolidated financial position or results of operations.

3. Restricted Cash

Restricted cash related to homebuilding operations included cash used as collateral for potential obligations paid by the Company’s bank, customer deposits temporarily restricted in accordance with regulatory requirements, and cash used in lieu of bonds. At June 30, 2012 and December 31, 2011, restricted cash related to homebuilding operations was $13.5 million and $13.3 million, respectively.

Restricted cash of PIC included cash held in escrow by PIC’s claim administrators. At June 30, 2012 and December 31, 2011, restricted cash of PIC was $0.4 million and $0.4 million, respectively.

 

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4. Investments

Investments consist of available-for-sale securities and are measured at fair value, which is based on quoted market prices or cash flow models. Accordingly, unrealized gains and temporary losses on investments, net of tax, are reported as accumulated other comprehensive income (loss). Realized gains and losses are determined using the specific identification method.

At June 30, 2012 and December 31, 2011, investments were as follows:

 

 
  
June 30, 2012
 
 
  
Cost /
Amortized
Cost
 
  
Gross
Unrealized
Gains
 
  
Gross
Unrealized
Losses
 
 
Fair Value
 
 
  
(In thousands)
 

Debt securities:

  
  
  
 

Corporate obligations

  
$
15,451
  
  
$
124
  
  
$
(3
 
$
15,572
  

Mortgage/asset-backed securities

  
 
68
  
  
 
10
  
  
 
0
  
 
 
78
  

Private debt obligations
(a)

  
 
1,716
  
  
 
11,647
  
  
 
0
  
 
 
13,363
  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

  
 
17,235
  
  
 
11,781
  
  
 
(3
 
 
29,013
  

Equity securities

  
 
4
  
  
 
8
  
  
 
0
  
 
 
12
  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments

  
$
17,239
  
  
$
11,789
  
  
$
(3
 
$
29,025
  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

 
  
December 31, 2011
 
 
  
Cost /
Amortized
Cost
 
  
Gross
Unrealized
Gains
 
  
Gross
Unrealized
Losses
 
 
Fair Value
 
 
  
(In thousands)
 

Debt securities:

  
  
  
 

Corporate obligations

  
$
20,747
  
  
$
158
  
  
$
(39
 
$
20,866
  

Mortgage/asset-backed securities

  
 
101
  
  
 
10
  
  
 
0
  
 
 
111
  

Private debt obligations
(a)

  
 
1,742
  
  
 
9,700
  
  
 
(2
 
 
11,440
  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

  
 
22,590
  
  
 
9,868
  
  
 
(41
 
 
32,417
  

Equity securities

  
 
4
  
  
 
7
  
  
 
0
  
 
 
11
  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments

  
$
22,594
  
  
$
9,875
  
  
$
(41
 
$
32,428
  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(a)
Through December 31, 2009, certain private debt obligations experienced other-than-temporary losses and $13.2 million of impairments were recorded. Unrealized gains of private debt obligations are stated as the difference between their fair value and cost basis, net of impairment.

For the three months ended June 30, 2012 and 2011, realized gains on available-for-sale securities were zero and $0.3 million, respectively, which were included in other (expense) income, net. For the six months ended June 30, 2012 and 2011, realized gains on available-for-sale securities were zero and $0.4 million, respectively, which were included in other (expense) income, net.

For the six months ended June 30, 2012, included in accumulated other comprehensive income (loss) were $2.0 million of unrealized gains and $(1.2) million of tax expense. For the six months ended June 30, 2011, included in accumulated other comprehensive income (loss) were $2.8 million of unrealized gains, reclassification adjustments for $0.2 million of realized gains and $(1.0) million of tax expense.

At June 30, 2012, the contractual maturities of debt securities classified as available-for-sale were as follows:

 

 
  
June 30, 2012
 
 
  
Cost
 
  
Fair Value
 
 
  
(In thousands)
 

Due in one year or less

  
$
15,032
  
  
$
15,156
  

Due after one year through five years

  
 
436
  
  
 
529
  

Due after five years through ten years

  
 
920
  
  
 
5,839
  

Due after ten years

  
 
779
  
  
 
7,411
  

Mortgage/asset-backed securities

  
 
68
  
  
 
78
  
  

 

 

    

 

 

 

Total

  
$
17,235
  
  
$
29,013
  
  

 

 

    

 

 

 

Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without penalty.

 

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At June 30, 2012, there were debt securities with a $0.4 million fair value and nominal unrealized losses that were in a continuous unrealized loss position for less than one year, and debt securities with a $28.6 million fair value with no continuous losses. At December 31, 2011, there were debt securities with a $10.9 million fair value and nominal unrealized losses that were in a continuous unrealized loss position for less than one year, and debt securities with a $21.5 million fair value with no continuous losses. We evaluated investments with unrealized losses to determine if they experienced an other-than-temporary impairment. This evaluation was based on various factors, including length of time securities were in a loss position, ability and intent to hold investments until temporary losses were recovered or mature, investee’s industry and amount of the unrealized loss. Based on these factors, unrealized losses at June 30, 2012 and December 31, 2011 were not deemed as an other-than-temporary impairment.

5. Fair Value Disclosures

ASC 820, Fair Value Measurement, 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

The financial instruments measured at fair value on a recurring basis were as follows:

 

 
  
June 30, 2012
 

Description

  
Level 1
 
  
Level 2
 
  
Level 3
 
  
Total
 
 
  
(In thousands)
 

Debt securities

  
$
12,092
  
  
$
4,485
  
  
$
12,436
  
  
$
29,013
  

Equity securities

  
 
0
  
  
 
12
  
  
 
0
  
  
 
12
  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

  
$
12,092
  
  
$
4,497
  
  
$
12,436
  
  
$
29,025
  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 
  
December 31, 2011
 

Description

  
Level 1
 
  
Level 2
 
  
Level 3
 
  
Total
 
 
  
(In thousands)
 

Debt securities

  
$
17,186
  
  
$
4,727
  
  
$
10,504
  
  
$
32,417
  

Equity securities

  
 
0
  
  
 
11
  
  
 
0
  
  
 
11
  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

  
$
17,186
  
  
$
4,738
  
  
$
10,504
  
  
$
32,428
  
  

 

 

    

 

 

    

 

 

    

 

 

 

Level 1 financial instruments are debt securities in which fair values were determined from quoted prices in an active market. Level 2 financial instruments are debt and equity securities in which fair values were determined from quoted prices in an inactive market or for similar instruments in an active market. Level 3 financial instruments are private debt securities where fair value was determined using a cash flow model that considered estimated interest rates, discount rates, prepayments and defaults.

The Company uses a third-party service provider to value its Level 3 financial instruments. Significant changes in the pricing of these instruments are compared to activity of similar financial instruments, or general market conditions, for reasonableness. At June 30, 2012, the unobservable inputs used in the valuation of Level 3 financial instruments were as follows:

 

 
  
Fair
Value
 
  
Valuation
Technique
  
Unobservable
Input
  
Range
(Weighted Average)
 
  
  
  
Constant
prepayment rate
  
 
15% - 20% (18%)
  

Private debt obligations

  
$
12,436
  
  
Discounted cash flow
  
Probability of default
  
 
2% (2%)
  
  
  
  
Recovery rate
  
 
50% - 70% (60%)
  

 

 

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At June 30, 2012, the summary of changes in fair value of Level 3 financial instruments was as follows:

 

 
  
Private Debt
Obligations
 
 
  
(In thousands)
 

Fair value at December 31, 2011

  
$
10,504
  

Unrealized gains, included in other comprehensive loss

  
 
1,932
  
  

 

 

 

Fair value at June 30, 2012

  
$
12,436
  
  

 

 

 

At June 30, 2012 and December 31, 2011, as required by ASC 825, Financial Instruments, the following presents net book values and estimated fair values of notes payable.

 

 
  
June 30, 2012
 
  
December 31, 2011
 
 
  
Net Book
Value
 
  
Estimated
Fair Value
 
  
Net Book
Value
 
  
Estimated
Fair Value
 
 
  
(In thousands)
 

$750,000 senior secured notes

  
$
750,000
  
  
$
785,625
  
  
$
750,000
  
  
$
697,500
  

Secured promissory notes

  
$
1,700
  
  
$
1,700
  
  
$
2,056
  
  
$
2,056
  

The $750.0 million senior secured notes are level 2 financial instruments in which fair value was based on quoted market prices at the end of the period in an inactive market.

Other financial instruments consist primarily of cash and cash equivalents, restricted cash, accounts and other receivables, accounts payable, other liabilities and secured promissory notes. Book values of these financial instruments approximate fair value due to their relatively short-term nature.

6. Accounts and Other Receivables, net

At June 30, 2012 and December 31, 2011, accounts and other receivables, net were as follows:

 

 
  
June 30,
2012
 
 
December 31,
2011
 
 
  
(In thousands)
 

Insurance receivables

  
$
117,129
  
 
$
109,390
  

Escrow receivables

  
 
3,516
  
 
 
5,815
  

Notes receivable

  
 
3,928
  
 
 
3,566
  

Other receivables

  
 
5,739
  
 
 
4,937
  

Reserve

  
 
(2,824
 
 
(3,019
  

 

 

   

 

 

 

Total accounts and other receivables, net

  
$
127,488
  
 
$
120,689
  
  

 

 

   

 

 

 

We record insurance receivables from insurance carriers for reimbursable claims pertaining to resultant damage from construction defects on closed homes (see Note12). Closed homes for policy years August 1, 2001 to July 31, 2009 are insured with third-party insurance carriers, and closed homes for policy years commencing August 1, 2009 are insured with affiliate insurance carriers.

We reserve for uncollectible receivables that are specifically identified or outstanding more than 120 days.

 

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7. Inventory

At June 30, 2012 and December 31, 2011, inventory was as follows:

 

 
  
June 30,
2012
 
  
December 31,
2011
 
 
  
(In thousands)
 

Model homes

  
$
73,294
  
  
$
82,339
  

Completed homes for sale

  
 
16,140
  
  
 
29,703
  

Homes under construction

  
 
170,881
  
  
 
97,952
  

Lots available for construction

  
 
292,613
  
  
 
282,292
  

Land under development

  
 
86,899
  
  
 
144,070
  

Land held for future development

  
 
128,072
  
  
 
129,247
  

Land deposits and preacquisition costs

  
 
26,862
  
  
 
18,207
  
  

 

 

    

 

 

 

Total inventory

  
$
794,761
  
  
$
783,810
  
  

 

 

    

 

 

 

Impairment

Inventory, including all captions listed above, are stated at cost, unless the carrying amount is determined to be unrecoverable, in which case inventories are written down to fair value (see Note 2).

For the three and six months ended June 30, 2012 and 2011, inventory impairment was as follows:

 

 
  
Three Months Ended June 30,
 
  
Six Months Ended June 30,
 
 
  
2012
 
  
2011
 
  
2012
 
  
2011
 
 
  
(Dollars in thousands)
 

Inventory impairment

  
$
0
  
  
$
9,684
  
  
$
0
  
  
$
10,302
  
  

 

 

    

 

 

    

 

 

    

 

 

 

Remaining carrying value of inventory impaired at end of period

  
$
0
  
  
$
8,810
  
  
$
0
  
  
$
9,840
  
  

 

 

    

 

 

    

 

 

    

 

 

 

Projects impaired

  
 
0
  
  
 
2
  
  
 
0
  
  
 
3
  
  

 

 

    

 

 

    

 

 

    

 

 

 

Projects evaluated for impairment
(a)

  
 
132
  
  
 
150
  
  
 
132
  
  
 
150
  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)
Large land parcels not subdivided into communities are counted as one project. Once parcels are subdivided, the project count will increase accordingly.

Write-off of Deposits and Preacquisition Costs

Land deposits and preacquisition costs for potential acquisitions and land option contracts are included in inventory. When a potential acquisition or land option contract is abandoned, related deposits and preacquisition costs are written off to other income, net. For the three and six months ended June 30, 2012, write-offs of deposits and preacquisition costs were $0.2 million and $0.4 million, respectively, and no option lots were abandoned. For the three and six months ended June 30, 2011, write-offs of deposits and preacquisition costs were $0.1 million and $0.1 million, respectively, and no option lots were abandoned.

 

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Interest Capitalization

Interest is capitalized on inventory and investments in joint ventures during development and other qualifying activities. Interest capitalized as cost of inventory is included in cost of sales as related units are closed. Interest capitalized as cost of investment in joint ventures is included in equity in income (loss) from joint venture as related units in the joint venture close.

For the three and six months ended June 30, 2012 and 2011, interest incurred, capitalized and expensed was as follows:

 

 
  
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
  
2012
 
 
2011
 
 
2012
 
 
2011
 
 
  
(In thousands)
 

Interest incurred

  
$
16,660
  
 
$
17,582
  
 
$
33,320
  
 
$
37,244
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expensed
(a)

  
$
5,909
  
 
$
4,375
  
 
$
12,197
  
 
$
8,326
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest capitalized as a cost of inventory

  
$
10,550
  
 
$
12,862
  
 
$
20,745
  
 
$
28,133
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest previously capitalized as a cost of inventory, included in cost of sales

  
$
(10,074
 
$
(8,342
 
$
(17,858
 
$
(14,150
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest previously capitalized as a cost of inventory, transferred from investments in joint ventures

  
$
0
  
 
$
641
  
 
$
0
  
 
$
641
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest capitalized in ending inventory
(b)

  
$
114,323
  
 
$
120,575
  
 
$
114,323
  
 
$
120,575
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest capitalized as a cost of investments in joint ventures

  
$
201
  
 
$
345
  
 
$
378
  
 
$
785
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest previously capitalized as a cost of investments in joint ventures, included in equity in income (loss) from joint ventures

  
$
(201
 
$
(212
 
$
(378
 
$
(455
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest previously capitalized as a cost of investments in joint ventures, transferred to inventory

  
$
0
  
 
$
(641
 
$
0
  
 
$
(641
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest capitalized in ending investments in joint ventures

  
$
0
  
 
$
635
  
 
$
0
  
 
$
635
  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)
For the three and six months ended June 30, 2012 and 2011, assets qualifying for interest capitalization was less than debt; therefore, non-qualifying interest was expensed.
(b)
Inventory impairment charges were recorded against total inventory of the respective community. Capitalized interest reflects the gross amount of capitalized interest as impairment charges recognized were generally not allocated to specific components of inventory.

 

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Table of Contents

8. Investments in Joint Ventures

Unconsolidated joint ventures, which we do not control but have significant influence through ownership interests generally up to 50%, are accounted for using the equity method of accounting. These joint ventures are generally involved in real property development. Earnings and losses are allocated in accordance with terms of joint venture agreements.

Losses and distributions from joint ventures in excess of the carrying amount of our investment (“Deficit Distributions”) are included in other liabilities. We record Deficit Distributions since we are liable for this deficit to respective joint ventures. Deficit Distributions are offset by future earnings of, or future contributions to, joint ventures. At June 30, 2012 and December 31, 2011, Deficit Distributions were $0.8 million and $0.9 million, respectively.

For the three and six months ended June 30, 2012 and 2011, there were no impairments on investments in joint ventures.

At December 31, 2011, total unconsolidated joint ventures’ notes payable were $103.7 million and included $55.4 million of bank and seller financing notes payable secured by real property and $48.3 million of notes payable to joint ventures’ partners, of which $15.4 million was secured by real property. At December 31, 2011, our consolidated joint venture, Shea Colorado, LLC (“SCLLC”), had investments in unconsolidated joint ventures, which, of the $103.7 million of total notes payable, these unconsolidated joint ventures had $14.0 million of bank and seller financing notes payable secured by real property and $40.9 million of notes payable with joint ventures’ partners, of which $15.4 million was secured by real property. In March 2012, our interest in SCLLC was redeemed by SCLLC and therefore, effective March 31, 2012, SCLLC’s investments in these unconsolidated joint ventures were excluded from these consolidated financial statements (see Note 13).

At June 30, 2012, total unconsolidated joint ventures’ notes payable were $32.1 million and included $25.7 million of bank and seller financing notes payable secured by real property and $6.4 million of notes payables with joint ventures’ partners. In addition, at June 30, 2012 and December 31, 2011, we had an indirect 12.3% effective ownership in a joint venture that had bank notes payable secured by real property of $7.2 million, in which we have not provided guarantees.

At June 30, 2012 and December 31, 2011, of the $32.1 million and $55.4 million in our unconsolidated joint ventures’ outstanding bank and seller financing secured notes payable, respectively, we provided guarantees on a joint and several basis for one secured note payable, which had an outstanding balance of $4.0 million and $11.2 million at June 30, 2012 and December 31, 2011, respectively. These guarantees include, but are not limited to, project completion and loan-to-value maintenance guarantees. At June 30, 2012 and December 31, 2011, we also had an indemnification agreement from our joint venture partner for 90% of this secured note payable’s outstanding balance of $4.0 million and $11.2 million, respectively. At June 30, 2012 and December 31, 2011, no liabilities were recorded for these guarantees as the fair value of secured real estate assets exceeded the outstanding notes payable. At June 30, 2012 and December 31, 2011, we have not provided guarantees on bank and seller financing secured notes payable of $21.7 million and $44.2 million, respectively, or on notes payable to joint ventures’ partners of $6.4 million and $48.3 million, respectively.

9. Variable Interest Entities

ASC 810 requires a VIE to be consolidated in financial statements of a company if it is the primary beneficiary of the VIE. Accordingly, the primary beneficiary has the power to direct activities of the VIE that most significantly impact the VIE’s economic performance, and the obligation to absorb its losses or the right to receive its benefits. All VIEs with which we were involved at June 30, 2012 and December 31, 2011 were evaluated to determine the primary beneficiary.

Joint Ventures

We routinely enter into joint ventures for homebuilding activities. Investments in these joint ventures may create a variable interest in a VIE, depending on contractual terms of the arrangement. We analyze our joint ventures in accordance with ASC 810 to determine whether they are VIEs and, if so, whether we are the primary beneficiary. At June 30, 2012 and December 31, 2011, these joint ventures were not consolidated into our consolidated financial statements since they were not VIEs, or in the event that they were VIEs, we were not the primary beneficiary.

At June 30, 2012 and December 31, 2011, we had a variable interest in a joint venture in which we do not hold a direct, or indirect, investment, and the joint venture was determined to be a VIE. The joint venture, Shea/Baker Ranch Associates, LLC (“Baker Ranch”), is owned 50% by an affiliate and 50% by a third-party. We provided an unconditional loan-to-value maintenance guarantee on Baker Ranch’s outstanding bank notes payable which, at June 30, 2012 and December 31, 2011, was $25.4 million. We have not recorded a liability for this obligation as the fair value of the secured real estate assets exceeded the outstanding notes payable (see Note 16).

 

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In accordance with ASC 810, we determined we were not the primary beneficiary of Baker Ranch because we did not have the power to direct activities that most significantly impact the economic performance of Baker Ranch, such as determining or limiting the scope or purpose of the entity, selling or transferring property owned or controlled by the entity, and arranging financing for the entity.

Land Option Contracts

We enter into land option contracts to procure land for home construction. Use of land option and similar contracts allows us to reduce market risks associated with direct land ownership and development, reduces capital and financial commitments, including interest and other carrying costs, and minimizes land inventory. Under these contracts, we pay a specified deposit for the right to purchase land, usually at a predetermined price. Under the requirements of ASC 810, certain contracts may create a variable interest with the land seller.

In compliance with ASC 810, we analyzed our land option and similar contracts to determine if respective land sellers are VIEs and, if so, if we are the primary beneficiary. Although we do not have legal title to the optioned land, ASC 810 requires us to consolidate a VIE if we are the primary beneficiary. At June 30, 2012 and December 31, 2011, we determined we were not the primary beneficiary of such VIEs because we did not have the power to direct activities of the VIE that most significantly impact the VIE’s economic performance, such as selling, transferring or developing land owned by the VIE.

At June 30, 2012, we had $6.0 million of refundable and non-refundable cash deposits associated with land option contracts with unconsolidated VIEs, having an $83.5 million remaining purchase price and subject to a specific performance clause. We also had $18.5 million of refundable and non-refundable cash deposits associated with land option contracts that were not with VIEs, having a $173.9 million remaining purchase price.

Our loss exposure on land option contracts consisted of non-refundable deposits, which were $24.0 million and $14.2 million at June 30, 2012 and December 31, 2011, respectively, and were included in inventory in the consolidated balance sheets.

10. Other Assets, Net

At June 30, 2012 and December 31, 2011, other assets were as follows:

 

 
  
June 30,
2012
 
  
December 31,
2011
 
 
  
(In thousands)
 

Income tax receivables

  
$
3,836
  
  
$
7,473
  

Prepaid professional fees

  
 
3,680
  
  
 
3,695
  

Prepaid loan fees

  
 
7,213
  
  
 
7,738
  

Prepaid bank fees

  
 
631
  
  
 
657
  

Deposits in lieu of bonds and letters of credit

  
 
7,817
  
  
 
6,439
  

Prepaid insurance

  
 
1,444
  
  
 
1,970
  

Other

  
 
1,804
  
  
 
1,048
  
  

 

 

    

 

 

 

Total other assets, net

  
$
26,425
  
  
$
29,020
  
  

 

 

    

 

 

 

Prepaid Professional and Loan Fees

In accordance with ASC 470, these debt issuance costs are capitalized to other assets and amortized as interest over the term of the related debt.

Deposits in Lieu of Bonds and Letters of Credit

We are required to make deposits in lieu of bonds with various agencies for some of our homebuilding projects. These deposits may be returned as the collateral requirements decrease, or replaced with new bonds as bonding becomes available.

In June 2010, due to maturity of an unsecured bank line of credit, certain letters of credit were presented for payment and recorded as deposits in lieu of letters of credit. These deposits may be returned as collateral requirements decrease, or replaced with new letters of credit.

 

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Table of Contents

11. Notes Payable

At June 30, 2012 and December 31, 2011, notes payable were as follows:

 

 
  
June 30,
2012
 
  
December 31,
2011
 
 
  
(In thousands)
 

$750,000 senior secured notes, due May 2019 at 8.625%

  
$
750,000
  
  
$
750,000
  

Promissory notes at 1% interest, maturing through 2013, secured by deeds of trust on inventory

  
 
1,700
  
  
 
2,056
  
  

 

 

    

 

 

 

Total notes payable

  
$
751,700
  
  
$
752,056
  
  

 

 

    

 

 

 

On May 10, 2011, 8.625% senior secured notes were issued in the aggregate principal of $750.0 million (the “Secured Notes”) and the outstanding obligations of the Company’s previous secured revolving lines of credit and notes payable (the “Secured Facilities”) were paid. Principal and interest paid under the Secured Facilities was $779.6 million and $2.5 million, respectively. Concurrent with payoff of the Secured Facilities, an $88.4 million loss on debt extinguishment was recognized.

The Secured Notes were issued pursuant to Rule 144A and Regulation S, with registration rights. The Secured Notes bear interest at 8.625% paid semi-annually on May 15 and November 15, and do not require principal payments until maturity on May 15, 2019. At June 30, 2012 and December 31, 2011, accrued interest was $8.1 million and $8.1 million, respectively.

Holders of the Secured Notes are entitled to the benefits of a registration rights agreement dated May 10, 2011 (“Registration Rights Agreement”) between the Company and the initial purchasers listed therein. Pursuant to the Registration Rights Agreement, we agreed to file a registration statement with the SEC for an offer to exchange the Secured Notes for a new issuance of substantially identical notes issued under the Securities Act on or before 180 days after May 10, 2011, and to consummate the exchange offer registered thereby on or before 360 days after May 10, 2011. We completed the registration of the Secured Notes with the SEC and the exchange of Secured Notes issued under the Securities Act on May 4, 2012.

Other than the Registration Rights Agreement relating to the Secured Notes described above, we were not subject to any other registration rights agreements with respect to any notes payable.

12. Other Liabilities

At June 30, 2012 and December 31, 2011, other liabilities were as follows:

 

 
  
June 30,
2012
 
  
December 31,
2011
 
 
  
(In thousands)
 

Completed operations

  
$
117,129
  
  
$
109,390
  

Warranty reserves

  
 
16,346
  
  
 
17,358
  

Deferred revenue

  
 
26,886
  
  
 
20,329
  

Provisions for closed homes/communities

  
 
8,842
  
  
 
13,156
  

Deposits

  
 
16,569
  
  
 
7,766
  

Legal reserves

  
 
7,146
  
  
 
5,824
  

Accrued interest

  
 
8,086
  
  
 
8,122
  

Accrued compensation and benefits

  
 
3,805
  
  
 
2,109
  

Distributions payable

  
 
3,073
  
  
 
3,344
  

Deficit Distributions (see Note 8)

  
 
846
  
  
 
928
  

Other

  
 
7,368
  
  
 
11,325
  
  

 

 

    

 

 

 

Total other liabilities

  
$
216,096
  
  
$
199,651
  
  

 

 

    

 

 

 

Completed Operations

Reserves for completed operations primarily represent claims for property damage to completed homes and projects outside of our one-to-two year warranty period. Specific terms and conditions of completed operations warranties vary depending on the market in which homes are closed and can range to 12 years. Expenses and liabilities are recorded for potential completed operations claims based upon aggregated loss experience, which includes an estimate of completed operations claims incurred but not reported, and is actuarially estimated using individual case-basis valuations and statistical analysis. From August 1, 2001 to July 31, 2009, completed operations claims are insured with third-party insurance carriers. Commencing August 1, 2009, completed operations claims are insured with affiliate insurance carriers.

 

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For the three and six months ended June 30, 2012 and 2011, changes in completed operations were as follows:

 

 
  
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
  
2012
 
 
2011
 
 
2012
 
 
2011
 
 
  
(In thousands)
 

Insured completed operations

  
 
 
 

Balance, beginning of the period

  
$
103,980
  
 
$
116,939
  
 
$
109,390
  
 
$
102,860
  

Reserves provided

  
 
17,517
  
 
 
2,518
  
 
 
18,908
  
 
 
1,174
  

Insurance purchased

  
 
0
  
 
 
0
  
 
 
0
  
 
 
16,520
  

Claims paid

  
 
(4,368
 
 
(4,354
 
 
(11,169
 
 
(5,451
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of the period

  
 
117,129
  
 
 
115,103
  
 
 
117,129
  
 
 
115,103
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Self-insured completed operations

  
 
 
 

Balance, beginning of the period

  
 
0
  
 
 
0
  
 
 
0
  
 
 
15,613
  

Reserves provided

  
 
0
  
 
 
0
  
 
 
0
  
 
 
907
  

Insurance purchased

  
 
0
  
 
 
0
  
 
 
0
  
 
 
(16,520
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of the period

  
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total completed operations

  
$
117,129
  
 
$
115,103
  
 
$
117,129
  
 
$
115,103
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Reserves provided for self-insured completed operations are included in cost of sales. Reserves provided for insured completed operations are offset by changes in insurance receivables (see Note 6), however, premiums paid for insured completed operations are included in cost of sales. For actual completed operations claims and estimates of completed operations claims incurred but not reported, we estimate and record insurance receivables under applicable policies when recovery is probable. At June 30, 2012 and December 31, 2011, insurance receivables were $117.1 million and $109.4 million, respectively.

Expenses, liabilities and receivables related to these claims are subject to a high degree of variability due to uncertainties such as trends in completed operations claims related to our markets and products built, claim settlement patterns and insurance industry practices. Although considerable variability is inherent in such estimates, we believe reserves for completed operations claims are adequate.

Warranty Reserve

We offer a limited one or two year warranty for our homes. Specific terms and conditions of these warranties vary depending on the market in which homes are closed. We estimate warranty costs to be incurred and record a liability and an expense to cost of sales when home revenue is recognized. We also include in our warranty reserve uncovered losses related to completed operations coverage, which approximates 12.5% of the total property damage. Factors affecting warranty liability include number of homes closed, historical and anticipated warranty claims, and cost per claim. We periodically assess adequacy of our warranty liabilities and adjust amounts as necessary.

For the three and six months ended June 30, 2012 and 2011, changes in warranty liability were as follows:

 

 
  
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
  
2012
 
 
2011
 
 
2012
 
 
2011
 
 
  
(In thousands)
 

Balance, beginning of the period

  
$
16,660
  
 
$
15,103
  
 
$
17,358
  
 
$
16,238
  

Provision for warranties

  
 
1,668
  
 
 
3,353
  
 
 
3,143
  
 
 
3,442
  

Warranty costs paid

  
 
(1,982
 
 
(3,118
 
 
(4,155
 
 
(4,342
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of the period

  
$
16,346
  
 
$
15,338
  
 
$
16,346
  
 
$
15,338
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred Revenue

Deferred revenue represents deferred profit on transactions in which an insufficient down payment was received or a future performance, passage of time or event is required. At June 30, 2012 and December 31, 2011, deferred revenue primarily represents the PIC Transaction described below.

Completed operations claims were previously insured through PIC for policy years August 1, 2001 to July 31, 2007. In December 2009, PIC entered into a series of novation and reinsurance transactions (the “PIC Transaction”).

 

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First, PIC entered into a novation agreement with JFSCI to novate its deductible reimbursement obligations related to its workers’ compensation and general liability risks at September 30, 2009, and its completed operations claims from August 1, 2005 to July 31, 2007. Concurrently, JFSCI entered into insurance arrangements with unrelated third-party insurance carriers to insure these programs. As a result of this novation, the $19.2 million gain was deferred in these consolidated financial statements and will be recognized as income (expense) when related claims are paid or actuarial estimates are adjusted. At June 30, 2012 and December 31, 2011, the remaining deferred revenue was $17.3 million and $15.6 million, respectively. For the three and six months ended June 30, 2012, we recognized $(2.3) million and $(1.7) million, respectively, of this deferral as expense, which was included in other (expense) income, net. For the three and six months ended June 30, 2011, we recognized $0.8 million and $0.9 million, respectively, of this deferral as income, which was included in other (expense) income, net.

Second, PIC entered into reinsurance agreements with various unrelated reinsurers that reinsured 100% of the completed operations claims coverage from August 1, 2001 to July 31, 2005. As a result of the reinsurance, the $15.6 million gain was deferred in these consolidated financial statements and will be recognized as income (expense) when the related claims are paid or actuarial estimates are adjusted. At June 30, 2012 and December 31, 2011, the remaining deferred revenue was $6.8 million and $1.1 million, respectively. For the three and six months ended June 30, 2012, we recognized $(5.9) million and $(5.7) million, respectively, of this deferral as expense, which was included in other (expense) income, net. For the three and six months ended June 30, 2011, we recognized $(1.6) million and $(1.5) million, respectively, of this deferral as expense, which was included in other (expense) income, net.

The increase in deferred revenue, and resultant expense, for the three and six months ended June 30, 2012 was the result of an increase in the actuary’s estimate of ultimate losses to be paid on these policies based on trends in completed operations claims related to our markets and products built, claim settlement patterns and insurance industry practices. However, at June 30, 2012, the estimated ultimate loss to be paid under these policies does not exceed the policy limits under the novation and reinsurance transactions.

Distributions Payable

In December 2011, our consolidated joint venture, Vistancia, LLC, sold its remaining interest in an unconsolidated joint venture. As a result of the sale, no other assets of Vistancia, LLC economically benefit the former non-controlling interest of Vistancia, LLC and the Company recorded the remaining $3.3 million distribution payable to the former non-controlling interest, which is paid $0.1 million quarterly. At June 30, 2012, the distribution payable was $3.1 million.

13. Related Party Transactions

Related Party Receivables and Payables

At June 30, 2012 and December 31, 2011, receivables from related parties, net were as follows:

 

 
  
June 30,
2012
 
 
December 31,
2011
 
 
  
(In thousands)
 

Note receivable from JFSCI

  
$
24,017
  
 
$
25,381
  

Notes receivable from unconsolidated joint ventures

  
 
319
  
 
 
25,631
  

Notes receivable from other related parties

  
 
20,482
  
 
 
21,013
  

Reserves for notes receivable from other related parties

  
 
(12,734
 
 
(12,697

Receivables from related parties

  
 
1,378
  
 
 
895
  
  

 

 

   

 

 

 

Total receivables from related parties, net

  
$
33,462
  
 
$
60,223
  
  

 

 

   

 

 

 

Until August 2011, we participated in a centralized cash management function operated by JFSCI, whereby net cash flows from operations were transferred daily with JFSCI and resulted in related party transactions and monetary transfers to settle amounts owed. In August 2011, we ceased participation in this function and performed it independently. Through May 2011, the resultant notes receivable and payable were unsecured, due on demand and accrued interest monthly based on Prime less 2.05%. In May 2011, concurrent with issuance of the Secured Notes, through a $75.0 million cash payment and $41.5 million contribution of assets, the receivable from JFSCI was paid down by JFSCI and converted to a $38.9 million unsecured term note receivable from JFSCI, bearing 4% interest, payable in equal quarterly installments and maturing May 15, 2019. In June 2012, June 2011 and August 2011, JFSCI elected to make prepayments, including accrued interest, of $1.9 million, $6.6 million and $7.7 million, respectively, and applied these prepayments to future installments such that JFSCI would not be required to make a payment until May 2014. At June 30, 2012 and December 31, 2011, the note receivable from JFSCI, including accrued interest, was $24.0 million and $25.4 million, respectively. Quarterly, we evaluate collectability of the note receivable from JFSCI, which includes consideration of JFSCI’s payment history, operating performance and future payment requirements under the note. Based on these criteria, and as JFSCI applied prepayments under the note to defer future installments until May 2014, we do not presently anticipate collection risks on the note receivable from JFSCI.

 

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Table of Contents

Notes receivable from unconsolidated joint ventures, including accrued interest, at June 30, 2012 and December 31, 2011 were $0.3 million and $25.6 million, respectively. At December 31, 2011, included in the $25.6 million of notes receivable were $25.2 million of notes receivable held by our consolidated joint venture, SCLLC. In March 2012, our interest in SCLLC was redeemed by SCLLC and therefore, effective March 31, 2012, SCLLC’s notes receivable from unconsolidated joint ventures were excluded from these consolidated financial statements. At June 30, 2012, the remaining note receivable from an unconsolidated joint venture bears interest at 8% and matures in 2020. Further, this note earns additional interest to achieve a 17.5% internal rate of return, subject to available cash flows of the joint venture, and can be repaid prior to 2020. Quarterly, we evaluate collectability of this note, which includes consideration of prior payment history, operating performance and future payment requirements under the applicable note. Based on these criteria, we do not presently anticipate collection risks on this note.

Notes receivable from other related parties, including accrued interest, at June 30, 2012 and December 31, 2011 were $7.7 million and $8.3 million, respectively, net of related reserves of $12.7 million and $12.7 million, respectively. These notes are unsecured and mature from November 2012 through April 2021. At June 30, 2012 and December 31, 2011, these notes bore interest ranging from Prime less .75% (2.5%) to 4.2%. Quarterly, we evaluate collectability of these notes. Our evaluation includes consideration of prior payment history, operating performance and future payment requirements under the applicable notes. At December 31, 2009, based on these criteria, notes receivable from Shea Management LLC and Shea Properties Management Company, Inc. (“SPMCI”) were deemed uncollectible and fully reserved. In June 2011, SPMCI paid the accrued interest for 2010 and thereafter. Therefore, unpaid interest in 2012 from SPMCI is not reserved; accrued interest prior to 2010 and the principal balance remain reserved. In addition, based on these criteria, we do not presently anticipate collection risks on the other notes.

The Company, entities under common control and these unconsolidated joint ventures also engage in transactions on behalf of the other, such as payment of invoices and payroll. The amounts resulting from these transactions are recorded in receivables from related parties or payables to related parties, non-interest bearing and due on demand. At June 30, 2012 and December 31, 2011, these receivables were $1.4 million and $0.9 million, respectively, and these payables were $4.3 million and $2.3 million, respectively.

Real Property and Joint Venture Transactions

In May 2012, SHLP purchased the Vistancia, LLC non-controlling interest’s entire 16.7% partnership interest in Vistancia, LLC for a nominal amount. The reduction in non-controlling interests as a result of the purchase was also nominal. The former non-controlling interest continues to receive the distribution payable, which is $0.1 million quarterly. At June 30, 2012, the distribution payable was $3.1 million (see Note 12).

In March 2012, SHLP’s entire 58% interest in SCLLC, a consolidated joint venture with Shea Properties II, LLC, a related party and the non-controlling interest, was redeemed by SCLLC. In valuing its 58% interest in SCLLC, SHLP, to ensure receipt of net assets of equal value to its ownership interest, used third-party real estate appraisals for real property held by SCLLC. The estimated fair value of the assets received by SHLP was $30.8 million. However, as the non-controlling interest is a related party under common control, the assets and liabilities received by SHLP were recorded at net book value and the difference in SHLP’s investment in SCLLC and the net book value of the assets and liabilities received was recorded as a reduction to SHLP’s equity.

As consideration for the redemption, SCLLC distributed assets and liabilities to SHLP having a net book value of $24.0 million, including $2.2 million cash, a $3.0 million secured note receivable, $20.0 million of inventory and $1.2 million of other liabilities. In addition, as a result of this redemption, SCLLC is excluded from these consolidated financial statements effective March 31, 2012, which resulted in a net reduction of $41.8 million in assets and $2.0 million in liabilities, and a corresponding reduction in total equity, of which $11.6 million was attributable to SHLP and $28.2 million was attributable to non-controlling interests.

At June 30, 2012 and 2011, we were the managing member for seven and nine, respectively, unconsolidated joint ventures and received a management fee from these joint ventures as reimbursement for direct and overhead costs incurred on behalf of the joint ventures. Fees from joint ventures representing reimbursement of our costs are recorded as a reduction to general and administrative expense. Fees from joint ventures representing profit are recorded as revenues. For the three and six months ended June 30, 2012, $0.7 million and $1.7 million of management fees, respectively, were offset against general and administrative expenses, and $0.1 million and $0.2 million of management fees, respectively, were included in revenues. For the three and six months ended June 30, 2011, $0.8 million and $1.7 million of management fees, respectively, were offset against general and administrative expenses, and $0.3 million and $0.6 million management fees, respectively, were included in revenues.

General and Administrative Related Party Transactions

JFSCI provides corporate services to us, including management, legal, tax, information technology, risk management, facilities, accounting, treasury and human resources. For the three and six months ended June 30, 2012, general and administrative expenses included $4.5 million and $8.4 million, respectively, for corporate services provided by JFSCI. For the three and six months ended June 30, 2011, general and administrative expenses included $3.3 million and $7.3 million, respectively, for corporate services provided by JFSCI.

 

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Table of Contents

We lease office space from related parties under non-cancelable operating leases. Leases are for five to ten year terms and generally provide for five year renewal options. For the three and six months ended June 30, 2012, related-party rental expense was $0.1 million and $0.3 million, respectively. For the three and six months ended June 30, 2011, related-party rental expense was $0.2 million and $0.4 million, respectively.

14. Income Taxes

For the six months ended June 30, 2012, income tax expense $0.1 million, resulting from taxable income in SHI, offset by the decrease in the deferred tax asset valuation allowance. At June 30, 2012, the net deferred tax asset was $36.9 million, which primarily related to available loss carryforwards, impairments of inventory and available-for-sale investments, housing inventory and land basis differences, and timing of income recognition. The $36.9 million deferred tax asset valuation allowance fully reserves the net deferred tax asset due to inherent uncertainty of future income. To the extent eligible taxable income exists, which allows tax benefits of these deferred tax assets to be utilized, the effective tax rate may be reduced, subject to certain limitations under Internal Revenue Code Section 382 (“Section 382”), by reducing the valuation allowance and offsetting a portion of taxable income.

In 2009, we filed a petition with the United States Tax Court (the “Tax Court”) regarding our position on the completed contract method for homebuilding activities by SHLP, SHI and subsidiaries. During 2010 and 2011, we engaged in formal and informal discovery with the IRS and the Tax Court heard trial testimony in July 2012 and has ordered the Company and the IRS to exchange briefs. We expect the matter to be submitted for decision to the Tax Court by the end of November 2012. We expect our position to prevail, and have accordingly, not recorded a liability for related taxes or interest for SHI and its subsidiaries. Furthermore, as a limited partnership, any income taxes, interest or penalties imposed on SHLP are the responsibility of the Partners and are not reflected in the tax provision in these consolidated financial statements. However, if the Tax Court rules in favor of the IRS, SHI could be obligated to pay the IRS and applicable state taxing authorities up to $61 million and, under the Tax Distribution Agreement, SHLP could be obligated to make a distribution to the Partners up to $104 million to fund their related payments to the IRS and the applicable state taxing authorities.

15. Owners’ Equity

Owners’ equity consists of partners’ preferred and common capital. Common capital is comprised of limited partners with a collective 78.38% ownership and general partner with a 20.62% ownership. Preferred capital is comprised of limited partners with either series B (“Series B”) or series D (“Series D”) classification. Series B holders have no ownership interest but earn a preferred return at Prime less 2.05% (1.2% at June 30, 2012 and December 31, 2011) per annum on unreturned capital balances. At June 30, 2012 and December 31, 2011, accumulated undistributed preferred returns for Series B holders were $19.8 million and $18.9 million, respectively. Series D holders have a 1% ownership interest and earn a preferred return at 7% per annum on unreturned preferred capital balances. At June 30, 2012 and December 31, 2011, accumulated undistributed preferred returns for Series D holders were $46.4 million and $40.3 million, respectively.

Net income is allocated to Partners in a priority order that considers previously allocated net losses and preferred return considerations and, thereafter, in proportion to their respective ownership interests. Net loss is allocated in a priority order to Partners generally in proportion to their ownership interests and adjusted capital account balances, and, thereafter, to the general partner.

The general partner, in its sole discretion, may make additional capital contributions or accept additional capital contributions from the limited partners. Cash distributions are made to Partners in proportion to their unpaid preferred returns and, thereafter, in proportion to their ownership interests. Distributions to Partners are made at the discretion of the general partner, including payment of personal income taxes related to the Company or other entities under control of Shea family members. Similarly, distributions to Partners from other entities under control of Shea family members, such as JFSCI, are used for payment of personal incomes taxes related to the Company and other uses.

16. Contingencies and Commitments

Lawsuits, claims and proceedings have been or 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 and environmental protection. 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, and are based on specific facts and circumstances, and we revise these estimates when necessary. At June 30, 2012 and December 31, 2011, we had reserves of $7.1 million and $5.8 million, respectively, net of expected recoveries, relating to these claims and matters, and while their outcome cannot be predicted with certainty, we believe we have appropriately reserved for them. However, if the liability arising from their resolution exceeds their recorded reserves, we could incur additional charges that could be significant.

 

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Table of Contents

Due to the inherent difficulty of predicting outcomes of legal claims and related contingencies, we generally cannot predict their ultimate resolution, related timing or eventual loss. If our evaluations indicate loss contingencies that could be material are not probable, but are reasonably possible, we will disclose their nature with an estimate of possible range of losses or a statement that such loss is not reasonably estimable. At June 30, 2012, the range of reasonably possible losses in excess of amounts recorded was not material.

At June 30, 2012 and December 31, 2011, in addition to guarantees on our joint venture’s outstanding borrowings, an unconditional loan-to-value maintenance guarantee was provided, on a joint and several basis, for a secured development loan for Baker Ranch, a related party in which we have no ownership interest (see Note 9). At June 30, 2012 and December 31, 2011, the loan had a $25.4 million outstanding principal balance. A liability was not recorded for this guarantee as the fair value of the secured real estate assets exceeded the outstanding notes payable.

At December 31, 2011, joint and several non-recourse (“bad boy”) guarantees were provided for two secured permanent financing loans of related parties in which we have no ownership interest. The bad boy guarantee may become a liability for us upon a voluntary bankruptcy filing by the related party borrower or occurrence of other “bad” acts, including fraud or a material misrepresentation by the related party borrower. At December 31, 2011, these loans had a $34.1 million outstanding principal balance. In February 2012 and June 2012, these loans matured and we were released as a guarantor.

On May 10, 2011, concurrent with issuance of the Secured Notes, we entered into a new $75.0 million letter of credit facility. At June 30, 2012 and December 31, 2011, outstanding letters of credit against the letter of credit facility were $4.2 million and $4.2 million, respectively.

We are required to provide surety bonds that guarantee completion of certain infrastructure serving our homebuilding projects. At June 30, 2012, we had a $68.7 million exposure in connection with $169.0 million of surety bonds issued for our projects. At December 31, 2011, we had a $71.0 million exposure in connection with $178.4 million of surety bonds issued for our projects.

We also provided indemnification for bonds issued by unconsolidated joint ventures and other related party projects in which we have no ownership interest. At June 30, 2012, we had a $29.3 million exposure in connection with $69.0 million of surety bonds issued for unconsolidated joint venture projects, and a $2.3 million exposure in connection with $6.2 million of surety bonds issued for related party projects. At December 31, 2011, we had a $29.3 million exposure in connection with $69.0 million of surety bonds issued for unconsolidated joint venture projects, and a $3.1 million exposure in connection with $6.9 million of surety bonds issued for related party projects.

Certain of our consolidated and joint ventures’ homebuilding projects utilize, and may continue to utilize, community facility district, metro-district and other local government bond financing programs to fund construction or acquisition of infrastructure improvements. Interest and principal on these bonds are typically paid from taxes and assessments levied on homeowners following the sale of new homes within the project. We have also entered into credit support arrangements where we make interest and principal payments on these bonds if the taxes and assessments levied on homeowners are insufficient to cover such obligations. Furthermore, reimbursement of these payments to us is dependent on the district or local government’s ability to generate sufficient tax and assessment revenues from the sale of new homes.

In December 2011, Vistancia, LLC, a consolidated joint venture, sold its remaining interest in an unconsolidated joint venture. As a condition of sale, the Company effectively remained an 8.33% guarantor on certain community facility district bond obligations to which the Company must meet a calculated tangible net worth; otherwise, the Company is required to fund collateral to the bond issuer. In May 2012, as a result of the Company purchasing the non-controlling interest’s remaining share in Vistancia, LLC, the Company is an effective 10% guarantor on these bond obligations. At June 30, 2012 and December 31, 2011, the Company exceeded the minimum tangible net worth requirement.

In certain consolidated homebuilding projects, we have contractual obligations to purchase and receive water system connection rights which, at June 30, 2012 and December 31, 2011, were $36.7 million. These water system connection rights are held and then transferred to homebuyers upon closing of their home or transferred upon sale of land to the respective buyer. These water system connection rights can also be sold or leased but generally only within the local jurisdiction.

As described in Note 14, in 2009, we filed a petition with the Tax Court regarding our position on the completed contract method for homebuilding activities. The Tax Court heard trial testimony in July 2012 and has ordered the Company and the IRS to exchange briefs. We expect the matter to be submitted for decision to the Tax Court by the end of November 2012. We expect our position to prevail, and accordingly, no liability for related taxes or interest has been recorded. However, if the Tax Court rules in favor of the IRS, SHI could be obligated to pay the IRS and applicable state taxing authorities up to $61 million and SHLP could be obligated to make a distribution to the Partners up to $104 million to fund their related payments to the IRS and the applicable state taxing authorities.

 

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17. Supplemental Disclosure to Consolidated Statements of Cash Flows

Supplemental disclosures to the consolidated statements of cash flows were as follows:

 

 
  
Six Months Ended
June 30,
 
 
  
2012
 
 
2011
 
 
  
(In thousands)
 

Supplemental disclosure of cash flow information

  
 

Income taxes (refunded) paid

  
$
(2,391
 
$
34
  

Interest paid, net of amounts capitalized

  
$
11,853
  
 
$
7,403
  

Supplemental disclosure of non-cash activities

  
 

Unrealized gain on available-for-sale investments, net

  
$
802
  
 
$
1,951
  

Reclassification of Deficit Distributions (from) to unconsolidated joint ventures (to) from other liabilities

  
$
(82
 
$
140
  

Purchase of land in exchange for note payable

  
$
1,097
  
 
$
803
  

Elimination of joint venture inventory, receivables from related parties and other assets

  
$
(41,600
 
$
0
  

Elimination of joint venture note payable and other liabilities

  
$
(1,949
 
$
0
  

Redemption of Company’s interest in consolidated joint venture and elimination of non-controlling interest, less cash retained by non-controlling interest

  
$
(39,651
 
$
0
  

Contribution of net assets for payment on notes receivable from related parties

  
$
0
  
 
$
41,524
  

Distribution of land from unconsolidated joint ventures

  
$
0
  
 
$
15,422
  

Distribution of note payable from unconsolidated joint ventures

  
$
0
  
 
$
599
  

18. Segment Information

Our homebuilding business, which is responsible for nearly all our operating results, constructs and sells single-family attached and detached homes designed to appeal to first-time, move-up and active adult homebuyers. Our homebuilding business also provides management services to joint ventures and other related and unrelated parties. We manage each homebuilding community as an operating segment and have aggregated these communities into reportable segments based on geography as follows:

 

 
 

Southern California, comprised of communities in Los Angeles, Ventura, Orange, Riverside and San Bernardino Counties;

 

 
 

San Diego, comprised of communities in San Diego County, California;

 

 
 

Northern California, comprised of communities in northern and central California;

 

 
 

Mountain West, comprised of communities in Colorado and Washington;

 

 
 

South West, comprised of communities in Arizona and Nevada; and

 

 
 

Other, comprised primarily of communities in Florida.

In accordance with ASC 280, Segment Reporting, in determining the most appropriate aggregation of our homebuilding communities, we also considered similar economic and other characteristics, including product types, average selling prices, gross profits, production processes, suppliers, subcontractors, regulatory environments, land acquisition results, and underlying demand and supply.

 

21


Table of Contents

Our Corporate segment primarily provides management services to our operating segments, and includes results of our captive insurance provider, which primarily administers claims reinsured by third-party carriers. Results of our insurance brokerage services business are also included in our Corporate segment.

The reportable segments follow the same accounting policies as our consolidated financial statements described in Note 2. 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. As a result of certain reporting changes that became effective December 31, 2011, we reclassified certain 2011 amounts to conform to the current reportable segments of the Company.

Financial information relating to reportable segments was as follows:

 

 
  
June 30,
2012
 
  
December 31,
2011
 
 
  
(In thousands)
 

Total assets:

  
  

Southern California

  
$
191,308
  
  
$
176,999
  

San Diego

  
 
135,530
  
  
 
127,438
  

Northern California

  
 
229,485
  
  
 
219,734
  

Mountain West

  
 
307,411
  
  
 
351,050
  

South West

  
 
95,770
  
  
 
105,621
  

Other

  
 
6,057
  
  
 
4,313
  
  

 

 

    

 

 

 

Total homebuilding assets

  
 
965,561
  
  
 
985,155
  

Corporate

  
 
320,381
  
  
 
342,961
  
  

 

 

    

 

 

 

Total assets

  
$
1,285,942
  
  
$
1,328,116
  
  

 

 

    

 

 

 
 
  
June 30,
2012
 
  
December 31,
2011
 
 
  
(In thousands)
 

Inventory:

  
  

Southern California

  
$
145,715
  
  
$
142,877
  

San Diego

  
 
116,269
  
  
 
105,595
  

Northern California

  
 
212,172
  
  
 
204,901
  

Mountain West

  
 
238,149
  
  
 
256,685
  

South West

  
 
78,902
  
  
 
71,289
  

Other

  
 
3,554
  
  
 
2,463
  
  

 

 

    

 

 

 

Total inventory

  
$
794,761
  
  
$
783,810
  
  

 

 

    

 

 

 

 

22


Table of Contents
 
  
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
  
2012
 
 
2011
 
 
2012
 
 
2011
 
 
  
(In thousands)
 
 
(In thousands)
 

Revenues:

  
 
 
 

Southern California

  
$
30,104
  
 
$
25,820
  
 
$
56,484
  
 
$
45,593
  

San Diego

  
 
10,180
  
 
 
14,145
  
 
 
24,287
  
 
 
19,906
  

Northern California

  
 
30,438
  
 
 
26,558
  
 
 
56,396
  
 
 
42,413
  

Mountain West

  
 
33,211
  
 
 
23,715
  
 
 
51,806
  
 
 
36,869
  

South West

  
 
26,700
  
 
 
23,257
  
 
 
46,215
  
 
 
41,425
  

Other

  
 
1,585
  
 
 
1,171
  
 
 
2,390
  
 
 
2,262
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total homebuilding revenues

  
 
132,218
  
 
 
114,666
  
 
 
237,578
  
 
 
188,468
  

Corporate

  
 
250
  
 
 
268
  
 
 
493
  
 
 
525
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  
$
132,468
  
 
$
114,934
  
 
$
238,071
  
 
$
188,993
  
  

 

 

   

 

 

   

 

 

   

 

 

 
 
  
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
  
2012
 
 
2011
 
 
2012
 
 
2011
 
 
  
(In thousands)
 
 
(In thousands)
 

(Loss) income before income taxes:

  
 
 
 

Southern California

  
$
3,302
  
 
$
(363
 
$
5,276
  
 
$
(2,688

San Diego

  
 
(1,502
 
 
(9,790
 
 
(1,500
 
 
(11,089

Northern California

  
 
612
  
 
 
(335
 
 
1,429
  
 
 
(2,063

Mountain West

  
 
(1,786
 
 
(1,936
 
 
(5,154
 
 
(3,717

South West

  
 
(1,494
 
 
(799
 
 
(3,150
 
 
(2,833

Other

  
 
25
  
 
 
539
  
 
 
(225
 
 
285
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total homebuilding loss before income taxes

  
 
(843
 
 
(12,684
 
 
(3,324
 
 
(22,105

Corporate

  
 
(10,429
 
 
(88,748
 
 
(8,898
 
 
(87,868
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loss before income taxes

  
$
(11,272
 
$
(101,432
 
$
(12,222
 
$
(109,973
  

 

 

   

 

 

   

 

 

   

 

 

 
 
  
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
  
2012
 
 
2011
 
 
2012
 
 
2011
 
 
  
(In thousands)
 
 
(In thousands)
 

Impairment:

  
 
 
 

Southern California

  
$
0
  
 
$
0
  
 
$
0
  
 
$
0
  

San Diego

  
 
0
  
 
 
9,684
  
 
 
0
  
 
 
9,684
  

Northern California

  
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  

Mountain West

  
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  

South West

  
 
0
  
 
 
0
  
 
 
0
  
 
 
618
  

Other

  
 
0
  
 
 
0
  
 
 
0
  
 
 
0
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total impairment

  
$
0
  
 
$
9,684
  
 
$
0
  
 
$
10,302
  
  

 

 

   

 

 

   

 

 

   

 

 

 

19. Supplemental Guarantor Information

On May 10, 2011, SHLP and Shea Homes Funding Corp., a wholly-owned subsidiary of SHLP (collectively “SHLP Corp”), issued 8.625% senior secured notes in the aggregate principal amount of $750.0 million (the “Secured Notes”) and the outstanding obligations of the Secured Facilities were paid.

The obligations under the Secured Notes are not guaranteed by any SHLP joint venture where SHLP Corp does not own 100% of the economic interest, including those that are consolidated, and the collateral securing the Secured Notes does not include a pledge of the capital stock of any subsidiary if such pledge would result in a requirement that SHLP Corp file separate financial statements with respect to such subsidiary pursuant to Rule 3-16 of Regulation S-X under the Securities Act. Presented herein are the condensed consolidated financial statements for the guarantor subsidiaries and non-guarantor subsidiaries.

 

23


Table of Contents

Condensed Consolidating Balance Sheet

June 30, 2012

 

 
  
SHLP
Corp (a)
 
  
Guarantor
Subsidiaries
 
 
Non-Guarantor
Subsidiaries
 
  
Eliminations
 
 
Total
 
 
  
(In thousands)
 

Assets

  
  
 
  
 

Cash and cash equivalents

  
$
139,748
  
  
$
87,585
  
 
$
13,604
  
  
$
0
  
 
$
240,937
  

Restricted cash

  
 
12,180
  
  
 
1,190
  
 
 
489
  
  
 
0
  
 
 
13,859
  

Investments

  
 
0
  
  
 
29,025
  
 
 
0
  
  
 
0
  
 
 
29,025
  

Accounts and other receivables, net

  
 
103,850
  
  
 
22,442
  
 
 
38,442
  
  
 
(37,246
 
 
127,488
  

Receivables from related parties, net

  
 
9,086
  
  
 
24,357
  
 
 
19
  
  
 
0
  
 
 
33,462
  

Inventory

  
 
585,503
  
  
 
208,635
  
 
 
1,676
  
  
 
(1,053
 
 
794,761
  

Investments in joint ventures

  
 
3,995
  
  
 
1,063
  
 
 
12,974
  
  
 
0
  
 
 
18,032
  

Investments in subsidiaries

  
 
660,984
  
  
 
74,772
  
 
 
96,063
  
  
 
(831,819
 
 
0
  

Property and equipment, net

  
 
380
  
  
 
1,573
  
 
 
0
  
  
 
0
  
 
 
1,953
  

Other assets, net

  
 
18,464
  
  
 
7,923
  
 
 
38
  
  
 
0
  
 
 
26,425
  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

  
$
1,534,190
  
  
$
458,565
  
 
$
163,305
  
  
$
(870,118
 
$
1,285,942
  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities and equity

  
  
 
  
 

Liabilities:

  
  
 
  
 

Notes payable

  
$
751,700
  
  
$
0
  
 
$
0
  
  
$
0
  
 
$
751,700
  

Payables to related parties

  
 
20
  
  
 
0
  
 
 
0
  
  
 
4,306
  
 
 
4,326
  

Accounts payable

  
 
21,656
  
  
 
13,722
  
 
 
414
  
  
 
(41
 
 
35,751
  

Other liabilities

  
 
150,364
  
  
 
37,434
  
 
 
66,556
  
  
 
(38,258
 
 
216,096
  

Intercompany

  
 
332,837
  
  
 
(351,149
 
 
22,618
  
  
 
(4,306
 
 
0
  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

  
 
1,256,577
  
  
 
(299,993
 
 
89,588
  
  
 
(38,299
 
 
1,007,873
  

Equity:

  
  
 
  
 

SHLP equity:

  
  
 
  
 

Owners’ equity

  
 
270,419
  
  
 
751,364
  
 
 
73,261
  
  
 
(824,625
 
 
270,419
  

Accumulated other comprehensive income

  
 
7,194
  
  
 
7,194
  
 
 
0
  
  
 
(7,194
 
 
7,194
  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total SHLP equity

  
 
277,613
  
  
 
758,558
  
 
 
73,261
  
  
 
(831,819
 
 
277,613
  

Non-controlling interests

  
 
0
  
  
 
0
  
 
 
456
  
  
 
0
  
 
 
456
  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity

  
 
277,613
  
  
 
758,558
  
 
 
73,717
  
  
 
(831,819
 
 
278,069
  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and equity

  
$
1,534,190
  
  
$
458,565
  
 
$
163,305
  
  
$
(870,118
 
$
1,285,942
  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(a)
Includes Shea Homes Funding Corp., whose financial position at June 30, 2012 was not material.

 

24


Table of Contents

Condensed Consolidating Balance Sheet

December 31, 2011

 

 
  
SHLP
Corp (b)
 
  
Guarantor
Subsidiaries
 
 
Non-Guarantor
Subsidiaries
 
  
Eliminations
 
 
Total
 
 
  
(In thousands)
 

Assets

  
  
 
  
 

Cash and cash equivalents

  
$
157,511
  
  
$
96,100
  
 
$
14,755
  
  
$
0
  
 
$
268,366
  

Restricted cash

  
 
11,747
  
  
 
1,538
  
 
 
433
  
  
 
0
  
 
 
13,718
  

Investments

  
 
0
  
  
 
32,428
  
 
 
0
  
  
 
0
  
 
 
32,428
  

Accounts and other receivables, net

  
 
94,949
  
  
 
22,208
  
 
 
39,520
  
  
 
(35,988
 
 
120,689
  

Receivables from related parties, net

  
 
8,147
  
  
 
26,753
  
 
 
25,323
  
  
 
0
  
 
 
60,223
  

Inventory

  
 
574,832
  
  
 
173,333
  
 
 
36,857
  
  
 
(1,212
 
 
783,810
  

Investments in joint ventures

  
 
4,141
  
  
 
1,265
  
 
 
12,464
  
  
 
0
  
 
 
17,870
  

Investments in subsidiaries

  
 
698,886
  
  
 
85,118
  
 
 
98,555
  
  
 
(882,559
 
 
0
  

Property and equipment, net

  
 
380
  
  
 
1,612
  
 
 
0
  
  
 
0
  
 
 
1,992
  

Other assets, net

  
 
18,851
  
  
 
10,057
  
 
 
112
  
  
 
0
  
 
 
29,020
  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

  
$
1,569,444
  
  
$
450,412
  
 
$
228,019
  
  
$
(919,759
 
$
1,328,116
  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities and equity

  
  
 
  
 

Liabilities:

  
  
 
  
 

Notes payable

  
$
751,457
  
  
$
0
  
 
$
599
  
  
$
0
  
 
$
752,056
  

Payables to related parties

  
 
0
  
  
 
0
  
 
 
1
  
  
 
2,342
  
 
 
2,343
  

Accounts payable

  
 
30,781
  
  
 
15,453
  
 
 
377
  
  
 
(548
 
 
46,063
  

Other liabilities

  
 
140,992
  
  
 
36,954
  
 
 
58,931
  
  
 
(37,226
 
 
199,651
  

Intercompany

  
 
345,311
  
  
 
(365,259
 
 
21,714
  
  
 
(1,766
 
 
0
  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

  
 
1,268,541
  
  
 
(312,852
 
 
81,622
  
  
 
(37,198
 
 
1,000,113
  

Equity:

  
  
 
  
 

SHLP equity:

  
  
 
  
 

Owners’ equity

  
 
294,511
  
  
 
756,872
  
 
 
119,297
  
  
 
(876,169
 
 
294,511
  

Accumulated other comprehensive income

  
 
6,392
  
  
 
6,392
  
 
 
0
  
  
 
(6,392
 
 
6,392
  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total SHLP equity

  
 
300,903
  
  
 
763,264
  
 
 
119,297
  
  
 
(882,561
 
 
300,903
  

Non-controlling interests

  
 
0
  
  
 
0
  
 
 
27,100
  
  
 
0
  
 
 
27,100
  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity

  
 
300,903
  
  
 
763,264
  
 
 
146,397
  
  
 
(882,561
 
 
328,003
  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and equity

  
$
1,569,444
  
  
$
450,412
  
 
$
228,019
  
  
$
(919,759
 
$
1,328,116
  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(b)
Includes Shea Homes Funding Corp., whose financial position at December 31, 2011 was not material.

 

25


Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Loss

Three Months Ended June 30, 2012

 

 
  
SHLP
Corp (a)
 
 
Guarantor
Subsidiaries
 
 
Non-Guarantor
Subsidiaries
 
 
Eliminations
 
 
Total
 
 
  
(In thousands)
 

Revenues

  
$
96,466
  
 
$
34,700
  
 
$
1,302
  
 
$
0
  
 
$
132,468
  

Cost of sales

  
 
(80,318
 
 
(27,496
 
 
(259
 
 
95
  
 
 
(107,978
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  
 
16,148
  
 
 
7,204
  
 
 
1,043
  
 
 
95
  
 
 
24,490
  

Selling expenses

  
 
(6,234
 
 
(2,839
 
 
(1,126
 
 
0
  
 
 
(10,199

General and administrative expenses

  
 
(7,995
 
 
(2,979
 
 
(599
 
 
0
  
 
 
(11,573

Equity in income (loss) from joint ventures, net

  
 
10
  
 
 
(7
 
 
314
  
 
 
0
  
 
 
317
  

Equity in loss from subsidiaries

  
 
(6,541
 
 
(9,534
 
 
(1,166
 
 
17,241
  
 
 
0
  

Interest expense

  
 
(5,511
 
 
(398
 
 
0
  
 
 
0
  
 
 
(5,909

Other (expense) income, net

  
 
(1,977
 
 
1,368
  
 
 
(7,694
 
 
(95
 
 
(8,398
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

  
 
(12,100
 
 
(7,185
 
 
(9,228
 
 
17,241
  
 
 
(11,272

Income tax expense

  
 
(1
 
 
(838
 
 
(9
 
 
0
  
 
 
(848
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  
 
(12,101
 
 
(8,023
 
 
(9,237
 
 
17,241
  
 
 
(12,120

Less: Net loss attributable to non-controlling interests

  
 
0
  
 
 
0
  
 
 
19
  
 
 
0
  
 
 
19
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to SHLP

  
$
(12,101
 
$
(8,023
 
$
(9,218
 
$
17,241
  
 
$
(12,101 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

  
$
(12,742
 
$
(8,664
 
$
(9,237
 
$
17,882
  
 
$
(12,761
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)
Includes Shea Homes Funding Corp.; no significant activity occurred in 2012.

Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income

Three Months Ended June 30, 2011

 

 
  
SHLP
Corp (b)
 
 
Guarantor
Subsidiaries
 
 
Non-Guarantor
Subsidiaries
 
 
Eliminations
 
 
Total
 
 
  
(In thousands)
 

Revenues

  
$
85,486
  
 
$
28,158
  
 
$
1,290
  
 
$
0
  
 
$
114,934
  

Cost of sales

  
 
(81,213
 
 
(22,935
 
 
(803
 
 
95
  
 
 
(104,856
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  
 
4,273
  
 
 
5,223
  
 
 
487
  
 
 
95
  
 
 
10,078
  

Selling expenses

  
 
(6,945
 
 
(3,081
 
 
(1,144
 
 
0
  
 
 
(11,170

General and administrative expenses

  
 
(6,241
 
 
(1,467
 
 
(557
 
 
0
  
 
 
(8,265

Equity in (loss) income from joint ventures

  
 
(224
 
 
22
  
 
 
100
  
 
 
0
  
 
 
(102

Equity in income (loss) from subsidiaries

  
 
1,242
  
 
 
(680
 
 
(108
 
 
(454
 
 
0
  

Loss on debt extinguishment

  
 
(88,384
 
 
0
  
 
 
0
  
 
 
0
  
 
 
(88,384

Interest expense

  
 
(4,000
 
 
(375
 
 
0
  
 
 
0
  
 
 
(4,375

Other income (expense), net

  
 
(826
 
 
1,248
  
 
 
459
  
 
 
(95
 
 
786
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

  
 
(101,105
 
 
890
  
 
 
(763
 
 
(454
 
 
(101,432

Income tax benefit (expense)

  
 
0
  
 
 
680
  
 
 
(4
 
 
0
  
 
 
676
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  
 
(101,105
 
 
1,570
  
 
 
(767
 
 
(454
 
 
(100,756

Less: Net income attributable to non-controlling interests

  
 
0
  
 
 
0
  
 
 
(349
 
 
0
  
 
 
(349
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to SHLP

  
$
(101,105
 
$
1,570
  
 
$
(1,116
 
$
(454
 
$
(101,105
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

  
$
(99,834
 
$
2,841
  
 
$
(767
 
$
(1,725
 
$
(99,485
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(b)
Includes Shea Homes Funding Corp. since inception on April 26, 2011; no significant activity occurred for the financial statement period presented above.

 

26


Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Loss

Six Months Ended June 30, 2012

 

 
  
SHLP
Corp (a)
 
 
Guarantor
Subsidiaries
 
 
Non-Guarantor
Subsidiaries
 
 
Eliminations
 
 
Total
 
 
  
(In thousands)
 

Revenues

  
$
164,252
  
 
$
71,027
  
 
$
2,792
  
 
$
0
  
 
$
238,071
  

Cost of sales

  
 
(134,524
 
 
(58,203
 
 
(445
 
 
159
  
 
 
(193,013
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  
 
29,728
  
 
 
12,824
  
 
 
2,347
  
 
 
159
  
 
 
45,058
  

Selling expenses

  
 
(11,613
 
 
(5,831
 
 
(2,107
 
 
0
  
 
 
(19,551

General and administrative expenses

  
 
(13,599
 
 
(5,030
 
 
(1,195
 
 
0
  
 
 
(19,824

Equity in income (loss) from joint ventures, net

  
 
139
  
 
 
(31
 
 
276
  
 
 
0
  
 
 
384
  

Equity in loss from subsidiaries

  
 
(2,790
 
 
(10,387
 
 
(2,443
 
 
15,620
  
 
 
0
  

Interest expense

  
 
(11,469
 
 
(724
 
 
(4
 
 
0
  
 
 
(12,197

Other (expense) income, net

  
 
(2,903
 
 
3,213
  
 
 
(6,243
 
 
(159
 
 
(6,092
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

  
 
(12,507
 
 
(5,966
 
 
(9,369
 
 
15,620
  
 
 
(12,222

Income tax expense

  
 
(5
 
 
(86
 
 
(5
 
 
0
  
 
 
(96
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  
 
(12,512
 
 
(6,052
 
 
(9,374
 
 
15,620
  
 
 
(12,318

Less: Net income attributable to non-controlling interests

  
 
0
  
 
 
0
  
 
 
(194
 
 
0
  
 
 
(194
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to SHLP

  
$
(12,512
 
$
(6,052
 
$
(9,568
 
$
15,620
  
 
$
(12,512
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

  
$
(11,710
 
$
(5,250
 
$
(9,374
 
$
14,818
  
 
$
(11,516
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)
Includes Shea Homes Funding Corp.; no significant activity occurred in 2012.

Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income

Six Months Ended June 30, 2011

 

 
  
SHLP
Corp (b)
 
 
Guarantor
Subsidiaries
 
 
Non-Guarantor
Subsidiaries
 
 
Eliminations
 
 
Total
 
 
  
(In thousands)
 

Revenues

  
$
146,273
  
 
$
38,867
  
 
$
3,853
  
 
$
0
  
 
$
188,993
  

Cost of sales

  
 
(133,735
 
 
(32,186
 
 
(2,524
 
 
143
  
 
 
(168,302
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  
 
12,538
  
 
 
6,681
  
 
 
1,329
  
 
 
143
  
 
 
20,691
  

Selling expenses

  
 
(12,284
 
 
(4,676
 
 
(2,428
 
 
0
  
 
 
(19,388

General and administrative expenses

  
 
(12,436
 
 
(2,954
 
 
(1,098
 
 
0
  
 
 
(16,488

Equity in (loss) income from joint ventures

  
 
(426
 
 
15
  
 
 
(84
 
 
0
  
 
 
(495

Equity in (loss) income from subsidiaries

  
 
1,013
  
 
 
(1,412
 
 
(815
 
 
1,214
  
 
 
0
  

Loss on debt extinguishment

  
 
(88,384
 
 
0
  
 
 
0
  
 
 
0
  
 
 
(88,384

Interest expense

  
 
(7,739
 
 
(587
 
 
0
  
 
 
0
  
 
 
(8,326

Other income (expense), net

  
 
(1,673
 
 
2,926
  
 
 
1,307
  
 
 
(143
 
 
2,417
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

  
 
(109,391
 
 
(7
 
 
(1,789
 
 
1,214
  
 
 
(109,973

Income tax benefit (expense)

  
 
(3
 
 
1,034
  
 
 
(14
 
 
0
  
 
 
1,017
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  
 
(109,394
 
 
1,027
  
 
 
(1,803
 
 
1,214
  
 
 
(108,956

Less: Net income attributable to non-controlling interests

  
 
0
  
 
 
0
  
 
 
(438
 
 
0
  
 
 
(438
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to SHLP

  
$
(109,394
 
$
1,027
  
 
$
(2,241
 
$
1,214
  
 
$
(109,394
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

  
$
(107,443
 
$
2,978
  
 
$
(1,803
 
$
(737
 
$
(107,005
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(b)
Includes Shea Homes Funding Corp. since inception on April 26, 2011; no significant activity occurred for the financial statement period presented above.

 

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Table of Contents

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2012

 

 
  
SHLP
Corp (a)
 
 
Guarantor
Subsidiaries
 
 
Non-Guarantor
Subsidiaries
 
 
Eliminations
 
 
Total
 
 
  
(In thousands)
 

Operating activities

  
 
 
 
 

Net cash (used in) provided by operating activities

  
$
(28,819
 
$
(29,883
 
$
22,534
  
 
$
2,538
  
 
$
(33,630
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities

  
 
 
 
 

Proceeds from sale of available-for-sale investments

  
 
0
  
 
 
5,212
  
 
 
0
  
 
 
0
  
 
 
5,212
  

Other investing activities

  
 
50
  
 
 
1,543
  
 
 
(784
 
 
0
  
 
 
809
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

  
 
50
  
 
 
6,755
  
 
 
(784
 
 
0
  
 
 
6,021
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

  
 
 
 
 

Intercompany

  
 
11,860
  
 
 
14,613
  
 
 
(23,935
 
 
(2,538
 
 
0
  

Other financing activities

  
 
(854
 
 
0
  
 
 
1,034
  
 
 
0
  
 
 
180
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  
 
11,006
  
 
 
14,613
  
 
 
(22,901
 
 
(2,538
 
 
180
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

  
 
(17,763
 
 
(8,515
 
 
(1,151
 
 
0
  
 
 
(27,429

Cash and cash equivalents at beginning of period

  
 
157,511
  
 
 
96,100
  
 
 
14,755
  
 
 
0
  
 
 
268,366
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  
$
139,748
  
 
$
87,585
  
 
$
13,604
  
 
$
0
  
 
$
240,937
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)
Includes Shea Homes Funding Corp.; no significant activity occurred in 2012.

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2011

 

 
  
SHLP
Corp (b)
 
 
Guarantor
Subsidiaries
 
 
Non-Guarantor
Subsidiaries
 
 
Eliminations
 
 
Total
 
 
  
(In thousands)
 

Operating activities

  
 
 
 
 

Net cash (used in) provided by operating activities

  
$
(18,295
 
$
(21,379
 
$
223
  
 
$
(5,057
 
$
(44,508
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities

  
 
 
 
 

Net proceeds from promissory notes from related parties

  
 
(2,026
 
 
(31,267
 
 
(453
 
 
135,487
  
 
 
101,741
  

Investments in joint ventures

  
 
(300
 
 
(86
 
 
(15,414
 
 
0
  
 
 
(15,800

Other investing activities

  
 
(72
 
 
2,445
  
 
 
5,525
  
 
 
0
  
 
 
7,898
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

  
 
(2,398
 
 
(28,908
 
 
(10,342
 
 
135,487
  
 
 
93,839
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

  
 
 
 
 

Repayments on revolving lines of credit

  
 
(80,448
 
 
0
  
 
 
0
  
 
 
0
  
 
 
(80,448

Borrowings from financial institutions

  
 
750,000
  
 
 
0
  
 
 
0
  
 
 
0
  
 
 
750,000
  

Principal payments to financial institutions and others

  
 
(720,835
 
 
0
  
 
 
0
  
 
 
0
  
 
 
(720,835

Intercompany

  
 
(5,451
 
 
127,993
  
 
 
7,888
  
 
 
(130,430
 
 
0
  

Other financing activities

  
 
7,366
  
 
 
0
  
 
 
3,828
  
 
 
0
  
 
 
11,194
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

  
 
(49,368
 
 
127,993
  
 
 
11,716
  
 
 
(130,430
 
 
(40,089
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  
 
(70,061
 
 
77,706
  
 
 
1,597
  
 
 
0
  
 
 
9,242
  

Cash and cash equivalents at beginning of period

  
 
99,511
  
 
 
54,393
  
 
 
12,970
  
 
 
0
  
 
 
166,874
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  
$
29,450
  
 
$
132,099
  
 
$
14,567
  
 
$
0
  
 
$
176,116
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(b)
Includes Shea Homes Funding Corp. since inception on April 26, 2011; no significant activity occurred for the financial statement period presented above.

 

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Table of Contents

20. Subsequent Events

Shea Homes Appreciation Rights Plan

On August 8, 2012, the Board of Directors of J.F. Shea Construction Management, Inc. (the “Board of Directors”), the ultimate general partner of SHLP, adopted, effective January 1, 2012, the Shea Homes Appreciation Rights Plan (the “SHAR Plan”), an equity appreciation plan designed to provide employees and non-employee service providers a financial incentive to contribute to the Company’s long-term success. The SHAR Plan provides for the issuance of units representing the right to receive payment, generally at the time such units vest, based on the increase in value of SHLP’s equity after grant of the units.

The Board of Directors administers the SHAR Plan and has the authority to make all determinations thereunder including participants, valuations, amount and timing of grants, vesting criteria, amount and timing of payments (including interim payments), modifications and termination.

On August 8, 2012, the Board of Directors approved the SHAR Plan 2012 Grant (the “2012 Grant”), effective January 1, 2012 (the “Effective Date”). The 2012 Grant provides for the issuance of up to 960,663 units at a stipulated base value of $10.00 per unit. The units granted pursuant to the 2012 Grant vest up to five years after the Effective Date. Subject to participant service eligibility requirements, appreciation in the value of the units during this period is payable to participants when such units vest. However, as a further incentive to participants, the Board of Directors concurrently approved annual interim payments of the 2012 Grant, payable to participants in March 2013, 2014 and 2015. Upon vesting, for each eligible participant, interim payments will be offset against the full appreciation of these units and the resultant net amount payable to participant, if any, will be paid upon vesting, which occurs in March 2016.

Shea Homes Cash Bonus Plan

On August 8, 2012, the Board of Directors approved the 2012 Shea Homes Cash Bonus Plan (the “Bonus Plan”), designed as a financial incentive to employees that recognizes individual and company performance. The Bonus Plan awards vary by employee and are based on various objective criteria, such as Company pre-tax profit, customer service scores and performance against business plan, and discretionary criteria.

 

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Table of Contents
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and accompanying notes included under Item 1 of this Report and our audited consolidated financial statements and accompanying notes included in the Prospectus.

RESULTS OF OPERATIONS

The tabular homebuilding operating data presented throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes data for SHLP and its wholly-owned subsidiaries and consolidated joint ventures. Data for our unconsolidated joint ventures is presented separately where indicated. Our ownership in unconsolidated joint ventures varies, but is generally less than or equal to 50%.

Our homebuilding business, which is responsible for nearly all our operating results, constructs and sells single-family attached and detached homes designed to appeal to first-time, move-up and active adult homebuyers. Our homebuilding business also provides management services to joint ventures and other related and unrelated parties. We manage each homebuilding community as an operating segment and have aggregated these communities into reportable segments based on geography as follows:

 

 
 

Southern California, comprised of communities in Los Angeles, Ventura, Orange, Riverside and San Bernardino Counties;

 

 
 

San Diego, comprised of communities in San Diego County, California;

 

 
 

Northern California, comprised of communities in northern and central California;

 

 
 

Mountain West, comprised of communities in Colorado and Washington;

 

 
 

South West, comprised of communities in Arizona and Nevada; and

 

 
 

Other, comprised primarily of communities in Florida.

In accordance with ASC 280, Segment Reporting, in determining the most appropriate aggregation of our homebuilding communities, we also considered similar economic and other characteristics, including product types, average selling prices, gross profits, production processes, suppliers, subcontractors, regulatory environments, land acquisition results, and underlying demand and supply.

Our Corporate segment primarily provides management services to our operating segments, and includes results of our captive insurance provider, which primarily administers claims reinsured by third-party carriers. Results of our insurance brokerage services business are also included in our Corporate segment.

Overview

The improvement in operating results in the second half of 2011 continued in the first half of 2012. For the three and six months ended June 30, 2012, as compared to the three and six months ended June 30, 2011, new home sales orders increased 43% and 44%, respectively, new home orders per community increased 80% and 65%, respectively, homes closed increased 12% and 20%, respectively, and homebuilding revenues increased 15% and 26%, respectively. Gross margin as a percentage of revenues improved 111%, from 8.8% to 18.5%, for the three months ended June 30, 2012 compared to June 30, 2011, and improved 73%, from 10.9% to 18.9%, for the six months ended June 30, 2012 compared to June 30, 2011. Furthermore, we believe we are positioned to take advantage of the housing market recovery. We have $270.0 million in cash, cash equivalents and investments and continue to invest in land opportunities in desirable locations to supplement our favorable land positions. In 2012, for the second year in a row, Shea Homes was honored as one of 50 top consumer brands in the United States to be named a “Customer Service Champion” by J.D. Power Associates, which should further differentiate our brand while lowering selling costs from increased referrals.

For the three months ended June 30, 2012, net loss attributable to SHLP was $(12.1) million compared to $(101.1) million for the three months ended June 30, 2011. This decrease in loss was primarily attributable to an $88.4 million loss on debt extinguishment in connection with the payoff of previously outstanding indebtedness in May 2011, $14.4 million of higher gross margin due to increased homes closed (307 homes closed in 2012 compared to 273 homes closed in 2011) and a 2% increase in average selling price on homes closed. Partially offsetting these were $3.3 million of increased general and administrative expenses primarily due to legal expenses associated with our tax court case on the use of the completed contract method, $1.5 million of increased interest expense from fewer assets qualifying for interest capitalization, and an $8.2 million charge for the increase of the deferred gain related to the novation and reinsurance of our completed operations reserves in 2009. This increase, and resultant expense, resulted from of an increase in an actuarial estimate of ultimate losses to be paid on these policies, which were based on completed operations claim trends related to our markets and products built, claim settlement patterns and insurance industry practices. However, at June 30, 2012, the estimated ultimate loss to be paid under these policies does not exceed the policy limits under the novation and reinsurance transactions.

 

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Table of Contents

For the six months ended June 30, 2012, net loss attributable to SHLP was $(12.5) million compared to $(109.4) million for the six months ended June 30, 2011. This decrease in loss was primarily attributable to an $88.4 million loss on debt extinguishment in connection with the payoff of previously outstanding indebtedness in May 2011, $24.4 million of higher gross margin due to increased homes closed (545 homes closed in 2012 compared to 455 homes closed in 2011) and a 4% increase in average selling price of homes closed. Partially offsetting these were $3.3 million of increased general and administrative expenses primarily due to legal expenses associated with our tax court case on the use of the completed contract method, $3.9 million of increased interest expense from fewer assets qualifying for interest capitalization, and a $7.4 million charge for the increase of the deferred gain related to the novation and reinsurance of our completed operations reserves in 2009.

 

 
  
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
  
2012
 
 
2011
 
 
% Change
 
 
2012
 
 
2011
 
 
% Change
 
 
  
(Dollars in thousands)
 

Revenues

  
$
132,468
  
 
$
114,934
  
 
 
15
 % 
 
$
238,071
  
 
$
188,993
  
 
 
26
 % 

Cost of sales

  
 
(107,978
 
 
(104,856
 
 
3
  
 
 
(193,013
 
 
(168,302
 
 
15
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  
 
24,490
  
 
 
10,078
  
 
 
143
  
 
 
45,058
  
 
 
20,691
  
 
 
118
  

Selling expenses

  
 
(10,199
 
 
(11,170
 
 
(9
 
 
(19,551
 
 
(19,388
 
 
1
  

General and administrative expenses

  
 
(11,573
 
 
(8,265
 
 
40
  
 
 
(19,824
 
 
(16,488
 
 
20
  

Equity in income (loss) from joint ventures

  
 
317
  
 
 
(102
 
 
(411
 
 
384
  
 
 
(495
 
 
(178

Loss on debt extinguishment

  
 
0
  
 
 
(88,384
 
 
(100
 
 
0
  
 
 
(88,384
 
 
(100

Interest expense

  
 
(5,909
 
 
(4,375
 
 
35
  
 
 
(12,197
 
 
(8,326
 
 
46
  

Other (expense) income, net

  
 
(8,398
 
 
786
  
 
 
(1,168
 
 
(6,092
 
 
2,417
  
 
 
(352
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

  
 
(11,272
 
 
(101,432
 
 
(89
 
 
(12,222
 
 
(109,973
 
 
(89

Income tax (expense) benefit

  
 
(848
 
 
676
  
 
 
(225
 
 
(96
 
 
1,017
  
 
 
(109
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  
 
(12,120
 
 
(100,756
 
 
(88
 
 
(12,318
 
 
(108,956
 
 
(89

Less: Net (income) loss attributable to non-controlling interests

  
 
19
  
 
 
(349
 
 
(105
 
 
(194
 
 
(438
 
 
(56
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to SHLP

  
$
(12,101
 
$
(101,105
 
 
(88
)% 
 
$
(12,512
 
$
(109,394
 
 
(89
)% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

  
$
(12,761
 
$
(99,485
 
 
(87
)% 
 
$
(11,516
 
$
(107,005
 
 
(89
)% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Seasonality

Historically, the homebuilding industry experiences seasonal fluctuations. We typically experience the highest new home sales order activity in spring and summer, although this activity is also highly dependent on the number of active selling communities, timing of new community openings and other market factors. Since it typically takes three to eight months to construct a new home, we deliver more homes in the second half of the year as spring and summer home sales orders convert to home deliveries. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest from April to October, and the majority of cash receipts from home closings occur during the second half of the year. Therefore, operating results for the three and six months ended June 30, 2012 are not necessarily indicative of results expected for the year ended December 31, 2012.

Further, in contrast to this historical seasonal pattern, weakness in homebuilding market conditions since 2006 has distorted our results. Although we may experience our seasonal pattern in the future, given current market conditions, we make no assurances as to when or whether this pattern will recur.

 

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Table of Contents

Revenues

Revenues are derived primarily from homes closed and land sales. House and land revenues are recorded at closing. Management fees from homebuilding ventures and projects are in other homebuilding revenues. Revenues generated from financial services, corporate and our captive insurance company, PIC, are in other revenues.

 

 
  
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
  
2012
 
  
2011
 
  
%
Change
 
 
2012
 
  
2011
 
  
%
Change
 
 
  
(Dollars in thousands)
 

Revenues:

  
  
  
 
  
  

House revenues

  
$
127,108
  
  
$
111,149
  
  
 
14
 
$
228,016
  
  
$
182,317
  
  
 
25

Land revenues

  
 
4,738
  
  
 
2,157
  
  
 
120
  
 
 
8,701
  
  
 
4,030
  
  
 
116
  

Other homebuilding revenues

  
 
372
  
  
 
1,360
  
  
 
(73
 
 
861
  
  
 
2,121
  
  
 
(59
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

  
 
132,218
  
  
 
114,666
  
  
 
15
  
 
 
237,578
  
  
 
188,468
  
  
 
26
  

Other revenues

  
 
250
  
  
 
268
  
  
 
(7
 
 
493
  
  
 
525
  
  
 
(6
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total revenues

  
$
132,468
  
  
$
114,934
  
  
 
15
 
$
238,071
  
  
$
188,993
  
  
 
26
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

For the three months ended June 30, 2012, total revenues were $132.5 million compared to $114.9 million for the three months ended June 30, 2011. This increase was primarily attributable to a 12% increase in homes closed and a 2% increase in the average selling price (“ASP”) of homes closed.

For the six months ended June 30, 2012, total revenues were $238.1 million compared to $189.0 million for the six months ended June 30, 2011. This increase was primarily attributable to a 20% increase in homes closed and an 4% increase in ASP of homes closed.

 

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Table of Contents

For the three and six months ended June 30, 2012 and 2011, homebuilding revenues by segment were as follows:

 

 
  
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
  
2012
 
  
2011
 
  
%
Change
 
 
2012
 
  
2011
 
  
%
Change
 
 
  
(Dollars in thousands)
 

Southern California:

  
  
  
 
  
  

House revenues

  
$
30,098
  
  
$
25,813
  
  
 
17
 % 
 
$
53,416
  
  
$
45,586
  
  
 
17
 % 

Land revenues

  
 
0
  
  
 
0
  
  
 
0
  
 
 
3,056
  
  
 
0
  
  
 
100
  

Other homebuilding revenues

  
 
6
  
  
 
7
  
  
 
(14
 
 
12
  
  
 
7
  
  
 
71
  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

  
$
30,104
  
  
$
25,820
  
  
 
17
 % 
 
$
56,484
  
  
$
45,593
  
  
 
24
 % 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

San Diego:

  
  
  
 
  
  

House revenues

  
$
10,136
  
  
$
14,125
  
  
 
(28
)% 
 
$
24,241
  
  
$
19,832
  
  
 
22
 % 

Land revenues

  
 
0
  
  
 
16
  
  
 
(100
 
 
0
  
  
 
66
  
  
 
(100

Other homebuilding revenues

  
 
44
  
  
 
4
  
  
 
1,000
  
 
 
46
  
  
 
8
  
  
 
475
  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

  
$
10,180
  
  
$
14,145
  
  
 
(28
)% 
 
$
24,287
  
  
$
19,906
  
  
 
22
 % 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Northern California:

  
  
  
 
  
  

House revenues

  
$
30,240
  
  
$
26,227
  
  
 
15
 % 
 
$
56,065
  
  
$
42,046
  
  
 
33
 % 

Land revenues

  
 
0
  
  
 
210
  
  
 
(100
 
 
0
  
  
 
210
  
  
 
(100

Other homebuilding revenues

  
 
198
  
  
 
121
  
  
 
64
  
 
 
331
  
  
 
157
  
  
 
111
  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

  
$
30,438
  
  
$
26,558
  
  
 
15
 % 
 
$
56,396
  
  
$
42,413
  
  
 
33
 %