Form 10-Q Shea Homes Limited Partnership

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

Published: 2013-11-12 13:08:31
Submitted: 2013-11-12
Period Ending In: 2013-09-30
d591111d10q.htm FORM 10-Q


ENT> 10-Q 1 d591111d10q.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 September 30, 2013

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
 
92618-2215
(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  
¨
    No  
x
.

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

EXPLANATORY NOTE

The registrant is a voluntary filer and is not subject to the filing requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). Although not subject to these filing requirements, the registrant has filed all Exchange Act reports for the preceding 12 months.


Table of Contents

SHEA HOMES LIMITED PARTNERSHIP

FORM 10-Q

INDEX

 

 
 
 
  
Page No.
 

  
 

ITEM 1.

  

  
 
  

  
 
1
  
 
  

  
 
2
  
 
  

  
 
3
  
 
  

  
 
4
  
 
  

  
 
5
  
 
  

  
 
6
  
 

ITEM 2.

  

  
 
31
  
 

ITEM 3.

  

  
 
47
  
 

ITEM 4.

  

  
 
48
  

  
 

ITEM 1.

  

  
 
50
  
 

ITEM 1A.

  

  
 
50
  
 

ITEM 6.

  

  
 
51
  

  
 
52
  


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)

 

 
  
September 30,
2013
 
  
December 31,
2012
 
 
  
(unaudited)
 
  
 
 

Assets

  
  

Cash and cash equivalents

  
$
143,198
  
  
$
279,756
  

Restricted cash

  
 
2,196
  
  
 
13,031
  

Accounts and other receivables, net

  
 
139,729
  
  
 
141,289
  

Receivables from related parties, net

  
 
32,681
  
  
 
34,028
  

Inventory

  
 
1,042,065
  
  
 
837,653
  

Investments in unconsolidated joint ventures

  
 
43,415
  
  
 
28,653
  

Other assets, net

  
 
39,679
  
  
 
39,127
  
  

 

 

    

 

 

 

Total assets

  
$
1,442,963
  
  
$
1,373,537
  
  

 

 

    

 

 

 

Liabilities and equity

  
  

Liabilities:

  
  

Notes payable

  
$
759,180
  
  
$
758,209
  

Payables to related parties

  
 
4,868
  
  
 
125
  

Accounts payable

  
 
49,325
  
  
 
62,738
  

Other liabilities

  
 
257,896
  
  
 
233,218
  
  

 

 

    

 

 

 

Total liabilities

  
 
1,071,269
  
  
 
1,054,290
  

Equity:

  
  

SHLP equity:

  
  

Owners’ equity

  
 
366,517
  
  
 
314,321
  

Accumulated other comprehensive income

  
 
4,769
  
  
 
4,517
  
  

 

 

    

 

 

 

Total SHLP equity

  
 
371,286
  
  
 
318,838
  

Non-controlling interests

  
 
408
  
  
 
409
  
  

 

 

    

 

 

 

Total equity

  
 
371,694
  
  
 
319,247
  
  

 

 

    

 

 

 

Total liabilities and equity

  
$
1,442,963
  
  
$
1,373,537
  
  

 

 

    

 

 

 

See accompanying notes

 

1


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Operations

(In thousands)

 

 
  
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
  
2013
 
 
2012
 
 
2013
 
 
2012
 
 
  
(unaudited)
 

Revenues

  
$
238,309
  
 
$
146,421
  
 
$
590,579
  
 
$
384,492
  

Cost of sales

  
 
(182,461
 
 
(115,225
 
 
(454,769
 
 
(308,238
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  
 
55,848
  
 
 
31,196
  
 
 
135,810
  
 
 
76,254
  

Selling expenses

  
 
(14,291
 
 
(10,296
 
 
(37,293
 
 
(29,847

General and administrative expenses

  
 
(14,097
 
 
(16,001
 
 
(40,132
 
 
(35,825

Equity in income (loss) from unconsolidated joint ventures, net

  
 
(616
 
 
(50
 
 
(770
 
 
334
  

Gain (loss) on reinsurance transaction

  
 
1,758
  
 
 
199
  
 
 
1,599
  
 
 
(7,168

Interest expense

  
 
(145
 
 
(4,581
 
 
(4,975
 
 
(16,778

Other income (expense), net

  
 
(1,350
 
 
8,640
  
 
 
(343
 
 
9,915
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  
 
27,107
  
 
 
9,107
  
 
 
53,896
  
 
 
(3,115

Income tax expense

  
 
(1,281
 
 
(807
 
 
(1,701
 
 
(903
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  
 
25,826
  
 
 
8,300
  
 
 
52,195
  
 
 
(4,018

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

  
 
(2
 
 
30
  
 
 
1
  
 
 
(164
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SHLP

  
$
25,824
  
 
$
8,330
  
 
$
52,196
  
 
$
(4,182
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

2


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

 

 
  
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
  
2013
 
 
2012
 
 
2013
 
 
2012
 
 
  
(unaudited)
 

Net income (loss)

  
$
25,826
  
 
$
8,300
  
 
$
52,195
  
 
$
(4,018

Other comprehensive income (loss), before tax

  
 
 
 

Unrealized investment holding gains (losses) during the year

  
 
95
  
 
 
(1,150
 
 
520
  
 
 
803
  

Less: Reclassification adjustments for investment (gains) losses included in other income (expense)

  
 
(2
 
 
(3,955
 
 
(39
 
 
(3,955
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss), before tax

  
 
25,919
  
 
 
3,195
  
 
 
52,676
  
 
 
(7,170

Income tax (expense) benefit relating to other comprehensive income / (loss)

  
 
(78
 
 
1,975
  
 
 
(229
 
 
824
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss), net of tax

  
 
25,841
  
 
 
5,170
  
 
 
52,447
  
 
 
(6,346

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

  
 
(2
 
 
30
  
 
 
1
  
 
 
(164
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to SHLP

  
$
25,839
  
 
$
5,200
  
 
$
52,448
  
 
$
(6,510
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

3


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, 2011

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

Comprehensive income (loss):

  
  
 
  
  
 
 
 
 

Net income (loss)

  
 
0
  
  
 
(4,182
 
 
0
  
  
 
0
  
  
 
(4,182
 
 
0
  
 
 
(4,182
 
 
164
  
 
 
(4,018

Change in unrealized gains on investments, net

  
 
0
  
  
 
0
  
 
 
0
  
  
 
0
  
  
 
0
  
 
 
(2,328
 
 
(2,328
 
 
0
  
 
 
(2,328
                 

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

  
  
 
  
  
 
 
 
(6,510
 
 
164
  
 
 
(6,346

Redemption of Company’s interest in consolidated joint venture (see Note 12)

  
 
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
  
 
 
(344
 
 
(344
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012 (unaudited)

  
$
1
  
  
$
157,793
  
 
$
120,955
  
  
$
0
  
  
$
278,749
  
 
$
4,064
  
 
$
282,813
  
 
$
427
  
 
$
283,240
  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

  
$
1,863
  
  
$
173,555
  
 
$
138,413
  
  
$
490
  
  
$
314,321
  
 
$
4,517
  
 
$
318,838
  
 
$
409
  
 
$
319,247
  

Comprehensive income (loss):

  
  
 
  
  
 
 
 
 

Net income (loss)

  
 
0
  
  
 
14,013
  
 
 
38,183
  
  
 
0
  
  
 
52,196
  
 
 
0
  
 
 
52,196
  
 
 
(1
 
 
52,195
  

Change in unrealized gains on investments, net

  
 
0
  
  
 
0
  
 
 
0
  
  
 
0
  
  
 
0
  
 
 
252
  
 
 
252
  
 
 
0
  
 
 
252
  
                 

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

  
  
 
  
  
 
 
 
52,448
  
 
 
(1
 
 
52,447
  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013 (unaudited)

  
$
1,863
  
  
$
187,568
  
 
$
176,596
  
  
$
490
  
  
$
366,517
  
 
$
4,769
  
 
$
371,286
  
 
$
408
  
 
$
371,694
  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

4


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Cash Flows

(In thousands)

 

 
  
Nine Months Ended
September 30,
 
 
  
2013
 
 
2012
 
 
  
(unaudited)
 
 
(unaudited)
 

Operating activities

  
 

Net income (loss)

  
$
52,195
  
 
$
(4,018

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

  
 

Equity in (income) loss from joint ventures

  
 
770
  
 
 
(334

(Gain) loss on reinsurance transaction

  
 
(1,599
 
 
7,168
  

Net gain on sale of available-for-sale investments

  
 
(15
 
 
(8,802

Depreciation and amortization expense

  
 
7,312
  
 
 
5,255
  

Net interest capitalized on investments in joint ventures

  
 
(1,473
 
 
(604

Distributions of earnings from joint ventures

  
 
6,000
  
 
 
1,400
  

Changes in operating assets and liabilities:

  
 

Restricted cash

  
 
10,835
  
 
 
(15

Receivables and other assets

  
 
(3,577
 
 
(7,783

Inventory

  
 
(212,623
 
 
(114,860

Payables and other liabilities

  
 
17,726
  
 
 
35,756
  
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

  
 
(124,449
 
 
(86,837

Investing activities

  
 

Proceeds from sale of available-for-sale investments

  
 
3,163
  
 
 
23,954
  

Net collections (advances) on promissory notes from related parties

  
 
3,037
  
 
 
1,931
  

Investments in unconsolidated joint ventures

  
 
(20,138
 
 
(1,711

Distributions of equity from unconsolidated joint ventures

  
 
3,822
  
 
 
244
  
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

  
 
(10,116
 
 
24,418
  

Financing activities

  
 

Principal payments to financial institutions and others

  
 
(1,993
 
 
(1,541

Contributions from non-controlling interests

  
 
0
  
 
 
1,746
  

Distributions to non-controlling interests

  
 
0
  
 
 
(344

Other financing activities

  
 
0
  
 
 
(168
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  
 
(1,993
 
 
(307
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

  
 
(136,558
 
 
(62,726

Cash and cash equivalents at beginning of period

  
 
279,756
  
 
 
268,366
  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

  
$
143,198
  
 
$
205,640
  
  

 

 

   

 

 

 

See accompanying notes

 

5


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2013

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, 2012. Adjustments, consisting of normal, recurring accruals, loss reserves and deferred tax asset valuation allowance adjustments, considered necessary for a fair presentation, are included.

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 August 6, 2013, by and between J.F. Shea, GP, a Delaware general 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, GP is 96% owned by JFSCI (see Note 14).

Nature of Operations

Our principal business purpose is homebuilding, which includes acquiring and developing land and constructing and selling new residential homes thereon. To a lesser degree, we develop lots and sell them to other homebuilders. Our principal markets are California, Arizona, Colorado, Washington, Nevada, Florida and Houston, Texas.

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 (see Note 11).

Seasonality

Historically, the homebuilding industry experiences seasonal fluctuations. We typically experience the highest home sales order activity in spring and summer, although this activity is also highly dependent on the number of active selling communities, timing of community openings and other market factors. Since it typically takes three to eight months to construct a home, we close more homes in the second half of the year as spring and summer home sales orders convert to home closings. Because of this seasonality, home starts, construction costs and related cash outflows are historically 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 nine months ended September 30, 2013 are not necessarily indicative of results expected for the year ending December 31, 2013.

Use of Estimates

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.

Reclassifications

Certain reclassifications were made in the 2012 condensed consolidated financial statements to conform to classifications in 2013. At December 31, 2012, investments of $12.1 million and property and equipment of $2.2 million were reclassified to other assets in the consolidated balance sheet. Additionally, for the nine months ended September 30, 2012, a $7.2 million loss on reinsurance was reclassified from other income (expense), net to gain (loss) on reinsurance transaction in the consolidated statements of operations and comprehensive income (loss), with corresponding changes made to operating cash flows in the consolidated statements of cash flows.

 

6


Table of Contents

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 adjusted to fair value or fair value less cost to sell. Quarterly, we review our real estate assets at each community for indicators of impairment. Real estate assets include projects actively selling, under development, held for future development or held for sale. Indicators of impairment include, but are not limited to, significant decreases in local housing market values and 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.

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 adjusted to fair value. For land held for sale, if the fair value less costs to sell exceed the asset’s carrying value, no impairment adjustment in required. 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) the number of homes available and the expected prices and incentives offered by us or builders in other communities, and future 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, home construction, interest, indirect construction and overhead, and selling and marketing costs; (iv) alternative product offerings that may be offered that could have an impact on sales pace, 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 rates has a direct impact on the estimated price of a home, the level of time sensitive costs (such as indirect construction, overhead and interest), and selling and marketing costs (such as model maintenance and advertising). Depending on the underlying objective of the community, assumptions could have a significant impact on the projected cash flows. For example, if our objective is to preserve operating margins, our cash flows 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, the impairment charge is 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 the 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.

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 are insured through a common set of 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 up to 12 years from the closing of a home.

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.

 

7


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 these factors, periodic changes to such factors based on updated relevant information could result in actual costs differing significantly from estimates.

In accordance with our underlying completed operations insurance policies, these completed operations claims costs are usually recoverable from our subcontractors or insurance carriers. Completed operations claims through July 31, 2009 are insured or reinsured with third-party insurance carriers and completed operations claims commencing August 1, 2009 are insured with third-party and 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 close. Housing and other real estate sales close when all conditions of escrow are met, including delivery of the home or other real estate asset, title passage, appropriate consideration is received or collection of associated receivables, if any, is reasonably assured and when we have no other continuing involvement in the asset. Sales incentives are a reduction of revenues when the respective unit closes.

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 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 our 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 in determining 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 February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”), which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, ASU 2013-02 requires an entity to present, either on the face of the income statement or in the notes to financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income in financial statements. For public entities, the amendments in ASU 2013-02 are effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted ASU 2013-02 effective January 1, 2013, which concerned disclosure requirements only and did not impact our consolidated financial statements.

3. Restricted Cash

At December 31, 2012, restricted cash 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. In January 2013, $10.0 million of restricted cash used as collateral for potential obligations paid by the Company’s bank was released to the Company. At September 30, 2013 and December 31, 2012, restricted cash was $2.2 million and $13.0 million, respectively.

 

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4. Fair Value Disclosures

At September 30, 2013 and December 31, 2012, as required by ASC 825, the following presents net book values and estimated fair values of notes payable.

 

 
  
September 30, 2013
 
  
December 31, 2012
 
 
  
Net Book
Value
 
  
Estimated
Fair Value
 
  
Net Book
Value
 
  
Estimated
Fair Value
 
 
  
(In thousands)
 

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

  
$
750,000
  
  
$
817,500
  
  
$
750,000
  
  
$
828,750
  

Secured promissory notes

  
$
9,180
  
  
$
9,180
  
  
$
8,209
  
  
$
8,209
  

The $750.0 million 8.625% senior secured notes due May 2019 (the “Secured Notes”) are level 2 financial instruments in which fair value was based on quoted market prices in an inactive market at the end of the period.

Other financial instruments consist primarily of cash and cash equivalents, restricted cash, accounts and other receivables, accounts payable and other liabilities and secured promissory notes. Book values of these financial instruments approximate fair value due to their relatively short-term nature. In addition, included in other assets are available-for-sale marketable securities, which are recorded at fair value.

5. Accounts and Other Receivables, net

At September 30, 2013 and December 31, 2012, accounts and other receivables, net were as follows:

 

 
  
September 30,
2013
 
 
December 31,
2012
 
 
  
(In thousands)
 

Insurance receivables

  
$
127,018
  
 
$
131,519
  

Escrow receivables

  
 
2,776
  
 
 
576
  

Notes receivables

  
 
3,192
  
 
 
3,662
  

Development receivables

  
 
3,095
  
 
 
3,325
  

Other receivables

  
 
5,603
  
 
 
4,147
  

Reserve

  
 
(1,955
 
 
(1,940
  

 

 

   

 

 

 

Total accounts and other receivables, net

  
$
139,729
  
 
$
141,289
  
  

 

 

   

 

 

 

Insurance receivables are from insurance carriers for reimbursable claims pertaining to resultant damage from construction defects on closed homes (see Note 11). Closed homes for policy years August 1, 2001 to July 31, 2009 are insured or reinsured with third-party insurance carriers, and closed homes for policy years commencing August 1, 2009 are insured with third-party and affiliate insurance carriers. At September 30, 2013 and December 31, 2012, insurance receivables from affiliate insurance carriers were $36.5 million and $30.2 million, respectively.

We reserve for uncollectible receivables that are specifically identified.

 

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6. Inventory

At September 30, 2013 and December 31, 2012, inventory was as follows:

 

 
  
September 30,
2013
 
  
December 31,
2012
 
 
  
(In thousands)
 

Model homes

  
$
81,813
  
  
$
69,210
  

Completed homes for sale

  
 
36,698
  
  
 
14,015
  

Homes under construction

  
 
274,244
  
  
 
189,929
  

Lots available for construction

  
 
335,061
  
  
 
249,463
  

Land under development

  
 
140,231
  
  
 
175,922
  

Land held for future development

  
 
74,879
  
  
 
60,466
  

Land held for sale, including water system connection rights

  
 
84,789
  
  
 
71,381
  

Land deposits and preacquisition costs

  
 
14,350
  
  
 
7,267
  
  

 

 

    

 

 

 

Total inventory

  
$
1,042,065
  
  
$
837,653
  
  

 

 

    

 

 

 

Impairment

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

For the nine months ended September 30, 2013 and 2012, there were no inventory impairment charges.

Interest Capitalization

Interest is capitalized on inventory and investments in unconsolidated joint ventures during development and other qualifying activities. Interest capitalized as a cost of inventory is included in cost of sales when related units close. Interest capitalized as part of investments in unconsolidated joint ventures is included in equity in income (loss) from unconsolidated joint ventures when related units in the joint ventures close.

For the three and nine months ended September 30, 2013 and 2012, interest incurred, capitalized and expensed was as follows:

 

 
  
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
  
2013
 
 
2012
 
 
2013
 
 
2012
 
 
  
(In thousands)
 

Interest incurred

  
$
16,780
  
 
$
16,768
  
 
$
50,322
  
 
$
50,088
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expensed
(a)

  
$
145
  
 
$
4,581
  
 
$
4,975
  
 
$
16,778
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest capitalized as a cost of inventory during the period

  
$
15,925
  
 
$
11,961
  
 
$
43,874
  
 
$
32,706
  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

  
$
(15,110
 
$
(12,457
 
$
(40,014
 
$
(30,315
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest capitalized in ending inventory
(b)

  
$
106,709
  
 
$
113,827
  
 
$
106,709
  
 
$
113,827
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest capitalized as a cost of investments in unconsolidated joint ventures during the period

  
$
710
  
 
$
226
  
 
$
1,473
  
 
$
604
  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

  
$
(244
 
$
(226
 
$
(829
 
$
(604
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest capitalized in ending investments in unconsolidated joint ventures

  
$
644
  
 
$
0
  
 
$
644
  
 
$
0
  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)
For the two and eight months ended August 31, 2013, assets qualifying for interest capitalization were less than debt; therefore, non-qualifying interest was expensed. For September 2013, qualifying assets exceeded debt; therefore, no interest was expensed.

For the three and nine months ended September 30, 2012, assets qualifying for interest capitalization were less than debt; therefore, non-qualifying interest was expensed.

 

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(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.

7. 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 September 30, 2013 and December 31, 2012, Deficit Distributions were $0.4 million and $0.7 million, respectively.

For the three and nine months ended September 30, 2013 and 2012, there were no impairment charges on investments in unconsolidated joint ventures.

At September 30, 2013 and December 31, 2012, total unconsolidated joint ventures’ notes payable were as follows:

 

 
  
September 30,
2013
 
  
December 31,
2012
 
 
  
(In thousands)
 

Bank and seller notes payable:

  
  

Guaranteed (subject to remargin obligations)

  
$
51,867
  
  
$
45,610
  

Non-guaranteed

  
 
10,385
  
  
 
22,894
  
  

 

 

    

 

 

 

Total bank and seller notes payable
(a)

  
 
62,252
  
  
 
68,504
  
  

 

 

    

 

 

 

Partner notes payable:

  
  

Unsecured
(b)

  
 
9,866
  
  
 
5,296
  
  

 

 

    

 

 

 

Total unconsolidated joint venture notes payable

  
$
72,118
  
  
$
73,800
  
  

 

 

    

 

 

 

Other unconsolidated joint venture notes payable
(c)

  
$
49,861
  
  
$
57,839
  
  

 

 

    

 

 

 

 

(a)
All bank seller notes were secured by real property.
(b)
No guarantees were provided on partner notes payable.
(c)
We have an indirect effective ownership in two joint ventures of 12.3% and .0003%, respectively, that had bank notes payable secured by real property, which we have not guaranteed.

At September 30, 2013 and December 31, 2012, remargin obligations and guarantees provided on debt of our unconsolidated joint ventures were on a joint and/or several basis and include, but are not limited to, project completion, interest and carry, and loan-to-value maintenance guarantees. At September 30, 2013 and December 31, 2012, we had an indemnification agreement from our joint venture partner for 90% of one secured loan balance, which had no outstanding borrowings on either date. However, we cannot provide assurance we could collect under this indemnity agreement. For a second joint venture, we have a remargin obligation that is limited to the lesser of 50% of the outstanding balances or $35.0 million in total for the joint venture loans, which outstanding loan balances were $51.0 million and $45.6 million at September 30, 2013 and December 31, 2012, respectively. Consequently, our maximum remargin obligation was $25.5 million and $22.8 million at September 30, 2013 and December 31, 2012, respectively. We also have an indemnification agreement from our joint venture partner where we could potentially recover a portion of any remargin payments made by the Company. However, we cannot provide assurance we could collect under this indemnity agreement. For a third joint venture, we have a joint and several remargin obligation which, in total, was $0.9 million and zero at September 30, 2013 and December 31, 2012, respectively. At September 30, 2013, the total maximum borrowings permitted on these loans were $21.6 million. We also have an indemnification agreement from our joint venture partner where we could potentially recover a portion of the related payments made by the Company. However, we cannot provide assurance we could collect under this indemnity agreement. No liabilities were recorded for these guarantees at September 30, 2013 and December 31, 2012, as the fair value of the secured real estate assets exceeded the outstanding notes payable.

Our ability to make joint venture and other restricted payments and investments is governed by the Indenture governing the Secured Notes (the “Indenture”). We are permitted to make otherwise restricted payments under (i) a $70.0 million revolving basket available solely for joint venture investments and (ii) a broader restricted payment basket available as long as our Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture), is at least 2.0 to 1.0. At September 30, 2013, the aggregate amount of the restricted payments made

 

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under this broader restricted payment basket could not exceed 50% of our cumulative Consolidated Net Income (as defined in the Indenture), generated subsequent to the issuance of the Secured Notes plus the aggregate net cash proceeds of, and the fair market value of, any property or other asset received by the Company as a capital contribution or upon the issuance of indebtedness or certain securities by the Company since the issuance of the Secured Notes, plus, to the extent not included in Consolidated Net Income, certain amounts received in connection with dispositions, distributions or repayments of restricted investments, plus the value of any unrestricted subsidiary which is redesignated as a restricted subsidiary under the Indenture. We have a number of joint ventures which have used, and are expected to use, capacity under these restricted payment baskets. During the second quarter of 2013, we entered into a joint venture in Southern California and committed to contribute up to $45.0 million of capital. At September 30, 2013 we made aggregate capital contributions of $11.6 million to this joint venture. We project that our peak investment of $45.0 million in this joint venture will occur in the fourth quarter of 2014 and, shortly thereafter, will be returned to the Company. In addition, we expect to make investments in this joint venture in 2015 at amounts well below the $45.0 million commitment, and we expect such additional investments in this joint venture will be returned to us by the end of 2015. We anticipate making additional investments in our other joint ventures which are not expected to be material in amount.

8. 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 at September 30, 2013 and December 31, 2012 were evaluated to determine the primary beneficiary.

Joint Ventures

We enter into joint ventures for homebuilding and land development activities. Investments in these joint ventures may create a variable interest in a VIE, depending on contractual terms of the venture. 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 September 30, 2013 and December 31, 2012, these joint ventures were not consolidated in our consolidated financial statements since they were not VIEs, or if they were VIEs, we were not the primary beneficiary.

At September 30, 2013 and December 31, 2012, we had a variable interest in an unconsolidated joint venture determined to be a VIE. The joint venture, RRWS, LLC (“RRWS”), was formed in December 2012 and is owned 50% by the Company and 50% by a third-party real estate developer (the “Partner”). Several acquisition, development and construction loans were entered into by RRWS, each with two-year terms and options to extend for one year, subject to certain conditions. The Company and Partner each executed limited completion, interest and carry guarantees and environmental indemnities on a joint and several basis. The Company also has a maximum aggregate liability under the re-margin arrangements of the lesser of 50% of the outstanding balances or $35.0 million in total. The obligations of the Company and Partner under the re-margin arrangements are limited during the first two years of the loans. In addition to re-margin arrangements, the Partner, and several of its principals, executed repayment guarantees with no limit on their liability. At September 30, 2013 and December 31, 2012, outstanding bank notes payable were $51.0 million and $45.6 million, respectively, of which the Company has a maximum remargin obligation of $25.5 million and $22.8 million, respectively. The Company also has an indemnification agreement from the Partner, under which the Company could potentially recover a portion of any remargin payments made to the bank. However, the Company cannot provide assurance it could collect under this indemnity agreement.

In accordance with ASC 810, we determined we were not the primary beneficiary of RRWS because we did not have the power to direct activities that most significantly impact the economic performance of RRWS, 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 accordance 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 September 30, 2013 and December 31, 2012, 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 September 30, 2013, we had $1.1 million of refundable and non-refundable cash deposits associated with land option contracts with unconsolidated VIEs, having a $19.9 million remaining purchase price. We also had $7.0 million of refundable and non-refundable cash deposits associated with land option contracts that were not with VIEs, having a $344.6 million remaining purchase price.

 

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Our loss exposure on land option contracts consists of non-refundable deposits, which were $7.2 million and $5.0 million at September 30, 2013 and December 31, 2012, respectively, and capitalized preacquisition costs of $6.3 million and $2.0 million, respectively, which were included in inventory in the consolidated balance sheets.

9. Other Assets, Net

At September 30, 2013 and December 31, 2012, other assets were as follows:

 

 
  
September 30,
2013
 
  
December 31,
2012
 
 
  
(In thousands)
 

Income tax receivable

  
$
1,633
  
  
$
3,497
  

Investments

  
 
9,408
  
  
 
12,078
  

Property and equipment, net

  
 
3,653
  
  
 
2,237
  

Prepaid professional fees

  
 
3,045
  
  
 
3,451
  

Prepaid loan fees

  
 
5,902
  
  
 
6,688
  

Prepaid bank fees

  
 
266
  
  
 
403
  

Deposits in lieu of bonds and letters of credit

  
 
11,085
  
  
 
7,110
  

Prepaid insurance

  
 
3,968
  
  
 
2,148
  

Other

  
 
719
  
  
 
1,515
  
  

 

 

    

 

 

 

Total other assets, net

  
$
39,679
  
  
$
39,127
  
  

 

 

    

 

 

 

Investments

Investments consist of available-for-sale securities, primarily private debt obligations, 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.

For the three and nine months ended September 30, 2013 there were no realized gains on available-for-sale securities. For each of the three and nine months ended September 30, 2012, there was $8.8M realized gains on available-for-sale securities.

Prepaid Professional and Loan Fees

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

Deposits in Lieu of Bonds and Letters of Credit

We are required to make cash 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 they are replaced with new bonds.

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

10. Notes Payable

At September 30, 2013 and December 31, 2012, notes payable were as follows:

 

 
  
September 30,
2013
 
  
December 31,
2012
 
 
  
(In thousands)
 

$750.0 million 8.625% senior secured notes, due May 2019

  
$
750,000
  
  
$
750,000
  

Promissory notes, interest ranging from 1% to 6%, maturing through 2014, secured by deeds of trust on inventory

  
 
9,180
  
  
 
8,209
  
  

 

 

    

 

 

 

Total notes payable

  
$
759,180
  
  
$
758,209
  
  

 

 

    

 

 

 

On May 10, 2011, our Secured Notes were issued at $750.0 million, 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. The Secured Notes are redeemable, in whole or in part, at the Company’s option beginning on May 15, 2015 at a price of 104.313 per bond, reducing to 102.156 on May 15, 2016 and are redeemable at par beginning on May 15, 2017. At September 30, 2013 and December 31, 2012, accrued interest was $24.3 million and $8.1 million, respectively.

 

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The Indenture governing the Secured Notes contains covenants that limit, among other things, our ability to incur additional indebtedness (including the issuance of certain preferred stock), pay dividends and distributions on our equity interests, repurchase our equity interests, retire unsecured or subordinated notes more than one year prior to their maturity, make investments in subsidiaries and joint ventures that are not restricted subsidiaries that guarantee the Secured Notes, sell certain assets, incur liens, merge with or into other companies, expand unto unrelated businesses, and enter in certain transaction with our affiliates. At September 30, 2013 and December 31, 2012, we were in compliance with these covenants.

11. Other Liabilities

At September 30, 2013 and December 31, 2012, other liabilities were as follows:

 

 
  
September 30,
2013
 
  
December 31,
2012
 
 
  
(In thousands)
 

Completed operations

  
$
127,018
  
  
$
131,519
  

Warranty reserves

  
 
19,061
  
  
 
17,749
  

Deferred revenue/gain

  
 
30,117
  
  
 
30,902
  

Provisions for closed homes/communities

  
 
9,990
  
  
 
8,135
  

Deposits (primarily homebuyer)

  
 
18,567
  
  
 
15,684
  

Legal reserves

  
 
4,361
  
  
 
4,916
  

Accrued interest

  
 
24,258
  
  
 
8,086
  

Accrued compensation and benefits

  
 
14,302
  
  
 
4,697
  

Distributions payable

  
 
2,621
  
  
 
2,892
  

Deficit Distributions (see Note 7)

  
 
377
  
  
 
716
  

Other

  
 
7,224
  
  
 
7,922
  
  

 

 

    

 

 

 

Total other liabilities

  
$
257,896
  
  
$
233,218
  
  

 

 

    

 

 

 

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 claims vary depending on the market in which homes close and can range to 12 years from the close of a home. 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-based valuations and statistical analysis. For policy years from August 1, 2001 through the present, completed operations claims are insured or reinsured through a combination of third-party and affiliate insurance carriers.

For the three and nine months ended September 30, 2013 and 2012, changes in completed operations reserves were as follows:

 

 
  
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
  
2013
 
 
2012
 
 
2013
 
 
2012
 
 
  
(In thousands)
 

Insured completed operations

  
 
 
 

Balance, beginning of the period

  
$
131,248
  
 
$
117,129
  
 
$
131,519
  
 
$
109,390
  

Reserves provided (relieved)

  
 
1,718
  
 
 
1,965
  
 
 
4,786
  
 
 
20,873
  

Claims paid

  
 
(5,948
 
 
(1,232
 
 
(9,287
 
 
(12,401
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of the period

  
$
127,018
  
 
$
117,862
  
 
$
127,018
  
 
$
117,862
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Reserves provided (relieved) for completed operations are generally fully offset by changes in insurance receivables (see Note 5), however, premiums paid for completed operations insurance policies 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 September 30, 2013 and December 31, 2012, insurance receivables were $127.0 million and $131.5 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.

 

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Table of Contents

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 close. 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 the uncovered losses related to completed operations coverage, which approximates 12.5% of the total property damage estimate. Factors affecting warranty liability include number of homes closed, historical and anticipated warranty claims, and cost per claim history and trends. We periodically assess adequacy of our warranty liabilities and adjust amounts as necessary.

For the three and nine months ended September 30, 2013 and 2012, changes in warranty liability were as follows:

 

 
  
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
  
2013
 
 
2012
 
 
2013
 
 
2012
 
 
  
(In thousands)
 

Balance, beginning of the period

  
$
18,521
  
 
$
16,346
  
 
$
17,749
  
 
$
17,358
  

Provision for warranties

  
 
2,804
  
 
 
1,326
  
 
 
7,190
  
 
 
4,469
  

Warranty costs paid

  
 
(2,264
 
 
(2,498
 
 
(5,878
 
 
(6,653
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of the period

  
$
19,061
  
 
$
15,174
  
 
$
19,061
  
 
$
15,174
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred Revenue/Gain

Deferred revenue/gain 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 September 30, 2013 and December 31, 2012, deferred revenue/gain primarily represents the PIC Transaction described below.

Completed operations claims were 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”).

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 for policy years August 1, 2001 to July 31, 2007, and its completed operations risks from August 1, 2005 to July 31, 2007. Concurrently, JFSCI entered into insurance arrangements with unrelated third party insurance carriers to insure these policies. As a result of this novation, a $19.2 million gain was originally deferred and will be recognized as income when related claims are paid. In addition, the deferred gain may be adjusted either up or down as changes to the underlying insurance reserves occur based on actuarial estimates. An increase to the deferred gain will result in a current period charge while a decrease in the deferred gain will result in current period income. At September 30, 2013 and December 31, 2012, the unamortized deferred gain was $19.5 million and $20.3 million, respectively. For the three and nine months ended September 30, 2013, we recognized $0.2 million and $0.8 million, respectively, of this deferral as income, which was included in other income (expense), net and represented the impact of a decrease in the deferred gain due to actuarial estimates and income recognition on claims paid. For the three and nine months ended September 30, 2012, we recognized $(0.1) million and $(1.7) million, respectively, of this deferral as expense, which was included in other income (expense), net and represented the impact of an increase in the deferred gain due to actuarial estimates, partially offset by income recognition on claims paid.

Second, PIC entered into reinsurance agreements with various unrelated reinsurers that reinsured 100% of the completed operations risks from August 1, 2001 to July 31, 2005. As a result of the reinsurance, a $15.6 million gain was originally deferred and will be recognized as income when the related claims are paid. In addition, the deferred gain can be increased or decreased based on changes in actuarial estimates. Any changes to the deferred gain will be recognized as a current period gain or charge. At September 30, 2013 and December 31, 2012, the unamortized deferred gain was $7.6 million and $8.4 million, respectively. For the three and nine months ended September 30, 2013, we recognized $1.5 million and $0.8 million, respectively, of this deferral as income, which was included in other income (expense), net. For the three and nine months ended September 30, 2012, we recognized $0.3 million and $(5.5) million, respectively, of this deferral as income (expense), which was included in other income (expense), net. The expense for the nine months ended September 30, 2012 represented the impact of an increase in the deferred gain due to actuarial estimates, partially offset by income recognition on claims paid.

As a result of the PIC Transaction, if the estimated ultimate loss to be paid under these policies exceeds the policy limits under the novation and reinsurance transactions, the shortfall is expected to be funded by JFSCI for the policies novated to JFSCI and by PIC for the policies they reinsured.

 

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Distributions Payable

In December 2011, our consolidated joint venture, Vistancia, LLC, sold its remaining interest in an unconsolidated joint venture (the “Vistancia Sale”). As a result of the Vistancia Sale, no other assets of Vistancia, LLC economically benefit the former non-controlling member of Vistancia, LLC and the Company recorded the remaining $3.3 million distribution payable to this member, which is paid $0.1 million quarterly. At September 30, 2013 and December 31, 2012, the remaining distribution payable was $2.6 million and $2.9 million, respectively.

12. Related Party Transactions

Related Party Receivables and Payables

At September 30, 2013 and December 31, 2012, receivables from related parties, net were as follows:

 

 
  
September 30,
2013
 
 
December 31,
2012
 
 
  
(In thousands)
 

Note receivable from JFSCI

  
$
21,373
  
 
$
24,498
  

Note receivable from unconsolidated joint venture

  
 
675
  
 
 
268
  

Notes receivable from related parties

  
 
19,678
  
 
 
19,940
  

Reserves for note receivables from related parties

  
 
(12,823
 
 
(12,766

Receivables from related parties

  
 
3,778
  
 
 
2,088
  
  

 

 

   

 

 

 

Total receivables from related parties, net

  
$
32,681
  
 
$
34,028
  
  

 

 

   

 

 

 

In May 2011, concurrent with issuance of the Secured Notes, the previous unsecured receivable from JFSCI was partially paid down and the balance converted to a $38.9 million unsecured term note receivable, bearing 4% interest, payable in equal quarterly installments and maturing May 15, 2019. In 2013 and 2012, JFSCI elected to make prepayments, including accrued interest, of $3.8 million and $1.9 million, respectively, and applied these prepayments to future installments such that JFSCI would not be required to make a payment until February 2015. At September 30, 2013 and December 31, 2012, the note receivable from JFSCI, including accrued interest, was $21.4 million and $24.5 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 February 2015, we do not anticipate collection risks on the note receivable from JFSCI.

At September 30, 2013 and December 31, 2012, the note receivable from unconsolidated joint venture, including accrued interest, was $0.7 million and $0.3 million, respectively. The note receivable 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 anticipate collection risks on this note.

At September 30, 2013 and December 31, 2012, notes receivable from other related parties, including accrued interest, were $6.9 million and $7.2 million, respectively, net of related reserves of $12.8 million and $12.8 million, respectively. These notes are unsecured and mature from August 2016 through April 2021. At September 30, 2013 and December 31, 2012, these notes bore interest ranging from Prime less .75% (2.5%) to 4.69%. Quarterly, we evaluate collectability of these notes which includes consideration of prior payment history, operating performance and future payment requirements under the applicable notes. At December 31, 2009, based on these criteria, two notes receivable were deemed uncollectible and fully reserved. We do not anticipate collection risks on the other notes.

The Company, entities under common control and certain 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, are non-interest bearing, due on demand and generally paid monthly. At September 30, 2013 and December 31, 2012, these receivables were $3.8 million and $2.1 million, respectively, and these payables were $0.1 million and $0.1 million, respectively.

Real Property and Joint Venture Transactions

In May 2012, for a nominal amount, SHLP purchased the non-controlling member’s entire 16.7% interest in Vistancia, LLC, a consolidated joint venture. However, the distribution payable remained (see Note 11).

In March 2012, SHLP’s entire 58% interest in Shea Colorado, LLC (“SCLLC”), a consolidated joint venture with Shea Properties II, LLC, a related party and the non-controlling member, was redeemed by SCLLC. In valuing its 58% interest in SCLLC, and to ensure receipt of net assets of equal value to its ownership interest, SHLP used third-party real estate appraisals. The estimated fair value of the assets received by SHLP was $30.8 million. However, as the non-controlling member 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.

 

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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. As a result of this redemption, SCLLC is no longer included in these consolidated financial statements effective March 31, 2012. This transaction resulted in a net reduction of $41.8 million in assets and $2.0 million in liabilities, and a $39.8 million reduction in total equity, of which $11.6 million was attributable to SHLP and $28.2 million was attributable to non-controlling interests.

At September 30, 2013 and 2012, we were the managing member for ten and seven, 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 and other associated costs. Fees from joint ventures representing reimbursement of our costs are recorded as a reduction to general and administrative expense. Fees from joint ventures representing amounts in excess of our costs are recorded as revenues. For the three and nine months ended September 30, 2013, $2.0 million and $5.6 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 nine months ended September 30, 2012, $0.8 million and $2.6 million of management fees, respectively, were offset against general and administrative expenses, and $0.1 million and $0.3 million of management fees, respectively, were included in revenues.

Other 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 nine months ended September 30, 2013, general and administrative expenses included $6.9 million and $17.9 million, respectively, for corporate services provided by JFSCI. For the three and nine months ended September 30, 2012, general and administrative expenses included $6.0 million and $14.4 million, respectively, for corporate services provided by JFSCI.

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 nine months ended September 30, 2013, related-party rental expense was $0.2 million and $0.3 million, respectively. For the three and nine months ended September 30, 2012, related-party rental expense was $0.2 million and $0.5 million, respectively.

We obtain workers compensation insurance, commercial general liability insurance and insurance for completed operations losses and damages with respect to our homebuilding operations from affiliate and unrelated third party insurance providers. These policies are purchased by affiliate entities and we pay premiums to these affiliates for the coverage provided by these third party and affiliate insurance providers. Policies covering these risks are written at various coverage levels but include a large self-insured retention or deductible. We have retention liability insurance from affiliated entities to insure these large retentions or deductibles. For the three and nine months ended September 30, 2013, amounts paid to affiliates for this retention insurance coverage were $5.1 million and $12.9 million, respectively. For the three and nine months ended September 30, 2012, amounts paid to affiliates for this retention insurance coverage were $3.9 million and $9.7 million, respectively.

13. Income Taxes

For the nine months ended September 30, 2013, income tax benefit (expense) was $(1.7) million. At September 30, 2013, the net deferred tax asset was $28.4 million, which primarily related to available loss carryforwards, inventory and investment impairments, and housing inventory and land basis differences. The $28.4 million deferred tax asset valuation allowance fully reserves the net deferred tax asset due to inherent uncertainty of future income as the housing recovery is in its early stages. We will continue to monitor industry and economic conditions, and our ability to generate taxable income based on our business plan and available tax planning strategies, which would allow us to utilize the tax benefits of the net deferred tax assets and thereby allow us to reverse all, or a portion of, our valuation allowance.

In 2009, we filed a petition with the United States Tax Court (the “Tax Court”) regarding our position on the completed contract method of accounting 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 ordered the Company and the IRS to exchange briefs, all of which have been filed. We expect the Tax Court to render its decision sometime during 2013 or 2014. We expect our position will 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 which may be 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, which is reasonably possible, SHI could be obligated to pay the IRS and applicable state taxing authorities up to $64 million and, under the Tax Distribution Agreement, SHLP could be obligated to make a distribution to the Partners up to $107 million to fund their related payments to the IRS and the applicable state taxing authorities. However, the Indenture provides that the amount we may pay on behalf of SHI and distribute to the partners of SHLP for this matter may not exceed $70.0 million. Any potential shortfall would be absorbed by the Partners of SHLP (see Note 15).

 

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14. 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 a 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% per annum through December 31, 2012 (1.2% at December 31, 2012) on unreturned preferred capital balances and Series D holders have a 1% ownership interest and earn a preferred return at 7% per annum through December 31, 2012 on unreturned preferred capital balances. In August 2013, the Agreement was amended and the rates on the Series B and Series D were changed, effective January 1, 2013. Series B earns a rate of 1.2% from January 1, 2013 to December 31, 2016, 2.25% from January 1, 2017 to December 31, 2020, and Prime less 2.05% from January 1, 2021 and thereafter on unreturned capital balances. Series D earns a rate of 2.0% from January 1, 2013 to December 31, 2016, 12.75% from January 1, 2017 to December 31, 2020, and 7.0% from January 1, 2021 and thereafter on unreturned capital balances. At September 30, 2013 and December 31, 2012, accumulated undistributed preferred returns for Series B holders were $22.2 million and $20.8 million, respectively. At September 30, 2013 and December 31, 2012, accumulated undistributed preferred returns for Series D holders were $55.6 million and $52.8 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, unreturned capital 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. In addition, distributions to Partners from other entities under control of Shea family members, such as JFSCI, can be used for payment of personal incomes taxes related to the Company and other uses.

15. Contingencies and Commitments

At September 30, 2013 and December 31, 2012, certain unrecorded contingent liabilities and commitments were as follows:

 

 
  
September 30,
2013
 
  
December 31,
2012
 
 
  
(In thousands)
 

Tax Court CCM case (capped at $70.0 million)

  
$
70,000
  
  
$
70,000
  

Remargin obligations for unconsolidated joint ventures (see Note 7)

  
 
26,373
  
  
 
22,805
  

Outstanding letters of credit

  
 
457
  
  
 
4,216
  

Costs to complete on surety bonds for Company projects

  
 
96,403
  
  
 
85,490
  

Costs to complete on surety bonds for joint venture projects

  
 
27,040
  
  
 
30,804
  

Costs to complete on surety bonds for related party projects

  
 
2,286
  
  
 
2,311
  

Water system connection rights purchase obligation

  
 
33,615
  
  
 
33,615
  
  

 

 

    

 

 

 

Total unrecorded contingent liabilities and commitments

  
$
255,296
  
  
$
249,241
  
  

 

 

    

 

 

 

Legal Claims

Lawsuits, claims and proceedings have been and will likely 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 September 30, 2013 and December 31, 2012, we had reserves of $4.4 million and $4.9 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.

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 September 30, 2013, the range of reasonably possible losses in excess of amounts recorded was not material.

 

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Table of Contents

As described in Note 13, in 2009, we filed a petition with the Tax Court regarding our position on the completed contract method of accounting (“CCM”) for homebuilding activities. The Tax Court heard trial testimony in July 2012 and ordered the Company and the IRS to exchange briefs, all of which have been filed. We expect our position will prevail, and accordingly, no liability for related taxes or interest has been recorded. However, if the Tax Court rules in favor of the IRS, which is reasonably possible, SHI could be obligated to pay the IRS and applicable state taxing authorities up to $64 million and SHLP could be obligated to make a distribution to the Partners up to $107 million to fund their related payments to the IRS and the applicable state taxing authorities.

Notwithstanding, the Indenture governing the Secured Notes restricts SHLP’s ability to make distributions to its partners pursuant to the Tax Distributions Agreement in excess of an amount specified by the Indenture (such maximum amount of collective distributions referred to as the “Maximum CCM Payment”), unless SHLP receives a cash equity contribution from JFSCI for such excess. The initial Maximum CCM Payment is $70.0 million, which will be reduced by payments made by SHI in connection with any resolution of our dispute with the IRS regarding our use of CCM and payments made by SHLP on certain guarantee obligations described in the Indenture. SHLP and SHI expect to pay any CCM-related tax liability from existing cash, cash from operations and, to the extent SHLP is required by the Tax Distribution Agreement to pay amounts in excess of the Maximum CCM Payment, from cash equity contributions by JFSCI.

Letters of Credit, Surety Bonds and Project Obligations

On May 10, 2011, we entered into a $75.0 million letter of credit facility. At September 30, 2013 and December 31, 2012, outstanding letters of credit against the letter of credit facility were $0.5 million and $4.2 million, respectively (see Note 19).

We provide surety bonds that guarantee completion of certain infrastructure serving our homebuilding projects. At September 30, 2013, there were $96.4 million of costs to complete in connection with the $178.5 million of surety bonds that were issued. At December 31, 2012, there were $85.5 million of costs to complete in connection with the $186.0 million of surety bonds that were issued.

We also provided indemnification for bonds issued by certain unconsolidated joint ventures and other related party projects in which we have no ownership interest. At September 30, 2013, there were $27.0 million of costs to complete in connection with $63.9 million of surety bonds that were issued for unconsolidated joint venture projects, and $2.3 million of costs to complete in connection with $5.9 million of surety bonds that were issued for related party projects. At December 31, 2012, $30.8 million of costs to complete in connection with $71.6 million of surety bonds were issued for unconsolidated joint venture projects, and $2.3 million of costs to complete in connection with $6.1 million of surety bonds that were issued for related party projects.

Certain of our homebuilding projects utilize community facility district, metro-district and other local government bond financing programs to fund acquisition or construction 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. Occasionally, we enter into credit support arrangements requiring us to pay interest and principal 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. At September 30, 2013 and December 31, 2012, in connection with a credit support arrangement, there was $6.6 million and $4.9 million, respectively, reimbursable to us from a metro-district in Colorado.

We also pay certain fees and costs associated with the construction of infrastructure improvements in homebuilding projects that utilize these district bond financing programs. These fees and costs are typically reimbursable to us from, and therefore dependent on, bond proceeds or taxes and assessments levied on homeowners. At September 30, 2013 and December 31, 2012, in connection with certain funding arrangements, there was $12.7 million and $16.3 million, respectively, reimbursable to us from certain agencies, including $11.4 million and $11.9 million, respectively, from a metro-district in Colorado.

Until bond proceeds or tax and assessment revenues are sufficient to cover our obligations and/or reimburse us, our responsibility to make interest and principal payments on these bonds or pay fees and costs associated with the construction of infrastructure improvements could be prolonged and significant.

As a condition of the Vistancia Sale, and the purchase of the non-controlling member’s remaining interest in Vistancia, LLC, the Company effectively remains a 10% guarantor on certain community facility district bond obligations to which the Company must meet a minimum calculated tangible net worth; otherwise, the Company is required to fund collateral to the bond issuer. At September 30, 2013 and December 31, 2012, the Company exceeded the minimum tangible net worth requirement.

In one consolidated homebuilding project, we have contractual obligations to purchase and receive water system connection rights which, at September 30, 2013 and December 31, 2012, had an estimated market value in excess of their contractual purchase price of $33.6 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.

 

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16. Supplemental Disclosure to Consolidated Statements of Cash Flows

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

 

 
  
Nine Months Ended
September 30,
 
 
  
2013
 
 
2012
 
 
  
(In thousands)
 

Supplemental disclosure of cash flow information

  
 

Income taxes paid (refunded)

  
$
66
  
 
$
(2,391

Interest paid, net of amounts capitalized

  
$
3,235
  
 
$
11,853
  

Supplemental disclosure of non-cash activities

  
 

Unrealized gain (loss) on available-for-sale investments, net

  
$
252
  
 
$
(2,328

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

  
$
(339
 
$
125
  

Purchase of land in exchange for note payable

  
$
2,964
  
 
$
8,567
  

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

  
$
0
  
 
$
(41,600

Elimination of consolidated joint venture note payable and other liabilities

  
$
0
  
 
$
(1,949

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

  
$
0
  
 
$
(39,651

Contribution to unconsolidated joint venture from inventory

  
$
4,082
  
 
$
0
  

17. Segment Information

Our homebuilding business, which is responsible for most of 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 and Orange Counties, and the Inland Empire;

 

 
 

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

 

 
 

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

 

 
 

Mountain West, comprised of communities in Colorado and Washington;

 

 
 

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

 

 
 

Other, comprised of communities in Florida.

In accordance with ASC 280, 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 and the deductibles and retentions under those third party policies. 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.

 

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Table of Contents

Financial information relating to reportable segments was as follows:

 

 
  
September 30,
2013
 
  
December 31,
2012
 
 
  
(In thousands)
 

Total assets:

  
  

Southern California

  
$
299,499
  
  
$
213,481
  

San Diego

  
 
162,237
  
  
 
148,272
  

Northern California

  
 
295,467
  
  
 
256,728
  

Mountain West

  
 
336,144
  
  
 
297,276
  

South West

  
 
157,121
  
  
 
105,470
  

Other

  
 
6,514
  
  
 
6,943
  
  

 

 

    

 

 

 

Total homebuilding assets

  
 
1,256,982
  
  
 
1,028,170
  

Corporate

  
 
185,981
  
  
 
345,367
  
  

 

 

    

 

 

 

Total assets

  
$
1,442,963
  
  
$
1,373,537
  
  

 

 

    

 

 

 

 

 
  
September 30,
2013
 
  
December 31,
2012
 
 
  
(In thousands)
 

Inventory:

  
  

Southern California

  
$
232,530
  
  
$
161,700
  

San Diego

  
 
144,759
  
  
 
129,895
  

Northern California

  
 
257,577
  
  
 
226,307
  

Mountain West

  
 
269,378
  
  
 
227,130
  

South West

  
 
136,103
  
  
 
89,756
  

Other

  
 
1,718
  
  
 
2,865
  
  

 

 

    

 

 

 

Total inventory

  
$
   1,042,065
  
  
$
   837,653
  
  

 

 

    

 

 

 

 

 
  
Three Months Ended September 30,
 
  
Nine Months Ended September 30,
 
 
  
2013
 
  
2012
 
  
2013
 
  
2012
 
 
  
(In thousands)
 
  
(In thousands)
 

Revenues:

  
  
  
  

Southern California

  
$
39,846
  
  
$
31,692
  
  
$
136,135
  
  
$
88,176
  

San Diego

  
 
40,535
  
  
 
10,960
  
  
 
81,522
  
  
 
35,247
  

Northern California

  
 
70,989
  
  
 
32,504
  
  
 
152,120
  
  
 
88,900
  

Mountain West

  
 
46,961
  
  
 
34,858
  
  
 
109,151
  
  
 
86,664
  

South West

  
 
37,471
  
  
 
34,439
  
  
 
105,157
  
  
 
80,654
  

Other

  
 
2,277
  
  
 
1,721
  
  
 
5,807
  
  
 
4,113
  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

  
 
238,079
  
  
 
146,174
  
  
 
589,892
  
  
 
383,754
  

Corporate

  
 
230
  
  
 
247
  
  
 
687
  
  
 
738
  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

  
$
238,309
  
  
$
146,421
  
  
$
590,579
  
  
$
384,492
  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 
  
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
  
2013
 
 
2012
 
 
2013
 
 
2012
 
 
  
(In thousands)
 
 
(In thousands)
 

Income (loss) before income taxes:

  
 
 
 

Southern California

  
$
8,961
  
 
$
(53
 
$
29,101
  
 
$
5,223
  

San Diego

  
 
2,836
  
 
 
(1,966
 
 
2,415
  
 
 
(3,466

Northern California

  
 
11,109
  
 
 
2,781
  
 
 
18,649
  
 
 
4,210
  

Mountain West

  
 
1,316
  
 
 
(203
 
 
632
  
 
 
(5,355

South West

  
 
1,230
  
 
 
(2,268
 
 
2,691
  
 
 
(5,417

Other

  
 
(134
 
 
(63
 
 
(289
 
 
(288
  

 

 

   

 

 

   

 

 

   

 

 

 

Total homebuilding income (loss) before income taxes

  
 
25,318
  
 
 
(1,772
 
 
53,199
  
 
 
(5,093

Corporate

  
 
1,789
  
 
 
10,879
  
 
 
697
  
 
 
1,978
  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income (loss) before income taxes

  
$
27,107
  
 
$
9,107
  
 
$
53,896
  
 
$
(3,115
  

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

18. Supplemental Guarantor Information

The obligations under the Secured Notes are not guaranteed by any SHLP joint venture where SHLP and Shea Homes Funding Corp., a wholly owned subsidiary (collectively “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.

Pursuant to the Indenture governing the Secured Notes, a guarantor may be released from its guarantee obligations only under certain customary circumstances specified in the Indenture, namely (1) upon the sale or other disposition (including by way of consolidation or merger) of such guarantor, (2) upon sale of disposition of all or substantially all the assets of such guarantor, (3) upon the designation of such guarantor as an unrestricted subsidiary for covenant purposes in accordance with the terms of the Indenture, (4) upon a legal defeasance or covenant defeasance pursuant to the Indenture, or (5) upon the full satisfaction of our obligations under the Indenture.

Presented herein are the condensed consolidated financial statements provided for in Rule 3-10(f) of Regulation S-K under the Securities Act for the guarantor subsidiaries and non-guarantor subsidiaries.

 

22


Table of Contents

Condensed Consolidating Balance Sheet

September 30, 2013

 

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

Assets

  
  
  
  
 

Cash and cash equivalents

  
$
128,666
  
  
$
5,214
  
  
$
9,318
  
  
$
0
  
 
$
143,198
  

Restricted cash

  
 
1,067
  
  
 
585
  
  
 
544
  
  
 
0
  
 
 
2,196
  

Accounts and other receivables, net

  
 
113,524
  
  
 
25,686
  
  
 
29,424
  
  
 
(28,905
 
 
139,729
  

Receivables from related parties, net

  
 
10,156
  
  
 
22,105
  
  
 
420
  
  
 
0
  
 
 
32,681
  

Inventory

  
 
725,100
  
  
 
314,707
  
  
 
2,627
  
  
 
(369
 
 
1,042,065
  

Investments in unconsolidated joint ventures

  
 
21,055
  
  
 
1,023
  
  
 
21,337
  
  
 
0
  
 
 
43,415
  

Investments in subsidiaries

  
 
679,295
  
  
 
66,336
  
  
 
91,627
  
  
 
(837,258
 
 
0
  

Other assets, net

  
 
23,629
  
  
 
16,016
  
  
 
34
  
  
 
0
  
 
 
39,679
  

Intercompany receivables

  
 
0
  
  
 
401,817
  
  
 
0
  
  
 
(401,817
 
 
0
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

  
$
1,702,492
  
  
$
853,489
  
  
$
155,331
  
  
$
(1,268,349
 
$
1,442,963
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and equity

  
  
  
  
 

Liabilities:

  
  
  
  
 

Notes payable

  
$
759,180
  
  
$
0
  
  
$
0
  
  
$
0
  
 
$
759,180
  

Payables to related parties

  
 
20
  
  
 
0
  
  
 
0
  
  
 
4,848
  
 
 
4,868
  

Accounts payable

  
 
31,145
  
  
 
17,814
  
  
 
366
  
  
 
0
  
 
 
49,325
  

Other liabilities

  
 
184,095
  
  
 
39,858
  
  
 
63,218
  
  
 
(29,275
 
 
257,896
  

Intercompany payables

  
 
356,766
  
  
 
0
  
  
 
49,898
  
  
 
(406,664
 
 
0
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

  
 
1,331,206
  
  
 
57,672
  
  
 
113,482
  
  
 
(431,091
 
 
1,071,269
  

Equity:

  
  
  
  
 

SHLP equity:

  
  
  
  
 

Owners’ equity

  
 
366,517
  
  
 
791,048
  
  
 
41,441
  
  
 
(832,489
 
 
366,517
  

Accumulated other comprehensive income

  
 
4,769
  
  
 
4,769
  
  
 
0
  
  
 
(4,769
 
 
4,769
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total SHLP equity

  
 
371,286
  
  
 
795,817
  
  
 
41,441
  
  
 
(837,258
 
 
371,286
  

Non-controlling interests

  
 
0
  
  
 
0
  
  
 
408
  
  
 
0
  
 
 
408
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

  
 
371,286
  
  
 
795,817
  
  
 
41,849
  
  
 
(837,258
 
 
371,694
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

  
$
1,702,492
  
  
$
853,489
  
  
$
155,331
  
  
$
(1,268,349
 
$
1,442,963
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(a)
Includes Shea Homes Funding Corp., whose financial position at September 30, 2013 was not material.

 

23


Table of Contents

Condensed Consolidating Balance Sheet

December 31, 2012

 

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

Assets

  
  
  
  
 

Cash and cash equivalents

  
$
216,914
  
  
$
48,895
  
  
$
13,947
  
  
$
0
  
 
$
279,756
  

Restricted cash

  
 
11,999
  
  
 
875
  
  
 
157
  
  
 
0
  
 
 
13,031
  

Accounts and other receivables, net

  
 
117,560
  
  
 
23,537
  
  
 
35,250
  
  
 
(35,058
 
 
141,289
  

Receivables from related parties, net

  
 
8,271
  
  
 
25,668
  
  
 
89
  
  
 
0
  
 
 
34,028
  

Inventory

  
 
572,010
  
  
 
264,459
  
  
 
1,918
  
  
 
(734
 
 
837,653
  

Investments in unconsolidated joint ventures

  
 
13,948
  
  
 
984
  
  
 
13,721
  
  
 
0
  
 
 
28,653
  

Investments in subsidiaries

  
 
672,388
  
  
 
64,971
  
  
 
93,883
  
  
 
(831,242
 
 
0
  

Other assets, net

  
 
17,712
  
  
 
21,388
  
  
 
27
  
  
 
0
  
 
 
39,127
  

Intercompany receivables

  
 
0
  
  
 
376,420
  
  
 
0
  
  
 
(376,420
 
 
0
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

  
$
1,630,802
  
  
$
827,197
  
  
$
158,992
  
  
$
(1,243,454
 
$
1,373,537
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and equity

  
  
  
  
 

Liabilities:

  
  
  
  
 

Notes payable

  
$
758,209
  
  
$
0
  
  
$
0
  
  
$
0
  
 
$
758,209
  

Payables to related parties

  
 
26
  
  
 
0
  
  
 
0
  
  
 
99
  
 
 
125
  

Accounts payable

  
 
34,384
  
  
 
27,879
  
  
 
475
  
  
 
0
  
 
 
62,738
  

Other liabilities

  
 
162,894
  
  
 
36,700
  
  
 
69,416
  
  
 
(35,792
 
 
233,218
  

Intercompany payables

  
 
356,451
  
  
 
0
  
  
 
20,068
  
  
 
(376,519
 
 
0
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

  
 
1,311,964
  
  
 
64,579
  
  
 
89,959
  
  
 
(412,212
 
 
1,054,290
  

Equity:

  
  
  
  
 

SHLP equity:

  
  
  
  
 

Owners’ equity

  
 
314,321
  
  
 
758,101
  
  
 
68,624
  
  
 
(826,725
 
 
314,321
  

Accumulated other comprehensive income

  
 
4,517
  
  
 
4,517
  
  
 
0
  
  
 
(4,517
 
 
4,517
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total SHLP equity

  
 
318,838
  
  
 
762,618
  
  
 
68,624
  
  
 
(831,242
 
 
318,838
  

Non-controlling interests

  
 
0
  
  
 
0
  
  
 
409
  
  
 
0
  
 
 
409
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

  
 
318,838
  
  
 
762,618
  
  
 
69,033
  
  
 
(831,242
 
 
319,247
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

  
$
1,630,802
  
  
$
827,197
  
  
$
158,992
  
  
$
(1,243,454
 
$
1,373,537
  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(a)
Includes Shea Homes Funding Corp., whose financial position at December 31, 2012 was not material.

 

24


Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

Three Months Ended September 30, 2013

 

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

Revenues

  
$
131,052
  
 
$
102,989
  
 
$
4,268
  
 
$
0
  
 
$
238,309
  

Cost of sales

  
 
(106,661
 
 
(75,615
 
 
(313
 
 
128
  
 
 
(182,461
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  
 
24,391
  
 
 
27,374
  
 
 
3,955
  
 
 
128
  
 
 
55,848
  

Selling expenses

  
 
(7,787
 
 
(5,081
 
 
(1,423
 
 
0
  
 
 
(14,291

General and administrative expenses

  
 
(8,427
 
 
(5,056
 
 
(614
 
 
0
  
 
 
(14,097

Equity in income (loss) from unconsolidated joint ventures, net

  
 
(579
 
 
10
  
 
 
(47
 
 
0
  
 
 
(616

Equity in income (loss) from subsidiaries

  
 
20,256
  
 
 
908
  
 
 
(822
 
 
(20,342
 
 
0
  

Gain (loss) on reinsurance transaction

  
 
0
  
 
 
0
  
 
 
1,758
  
 
 
0
  
 
 
1,758
  

Interest expense

  
 
(130
 
 
(15
 
 
0
  
 
 
0
  
 
 
(145

Other income (expense), net

  
 
(1,900
 
 
797
  
 
 
(119
 
 
(128
 
 
(1,350
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  
 
25,824
  
 
 
18,937
  
 
 
2,688
  
 
 
(20,342
 
 
27,107
  

Income tax benefit (expense)

  
 
0
  
 
 
(1,282
 
 
1
  
 
 
0
  
 
 
(1,281
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  
 
25,824
  
 
 
17,655
  
 
 
2,689
  
 
 
(20,342
 
 
25,826
  

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

  
 
0
  
 
 
0
  
 
 
(2
 
 
0
  
 
 
(2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SHLP

  
$
25,824
  
 
$
17,655
  
 
$
2,687
  
 
$
(20,342
 
$
25,824
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

  
$
25,839
  
 
$
17,670
  
 
$
2,689
  
 
$
(20,357
 
$
25,841
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)
Includes Shea Homes Funding Corp.; no significant activity occurred in 2013.

 

25


Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

Three Months Ended September 30, 2012

 

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

Revenues

  
$
101,564
  
 
$
42,386
  
 
$
2,471
  
 
$
0
  
 
$
146,421
  

Cost of sales

  
 
(78,924
 
 
(36,130
 
 
(298
 
 
127
  
 
 
(115,225
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  
 
22,640
  
 
 
6,256
  
 
 
2,173
  
 
 
127
  
 
 
31,196
  

Selling expenses

  
 
(5,654
 
 
(3,002
 
 
(1,640
 
 
0
  
 
 
(10,296

General and administrative expenses

  
 
(10,431
 
 
(4,598
 
 
(972
 
 
0
  
 
 
(16,001

Equity in income (loss) from unconsolidated joint ventures, net

  
 
(148
 
 
(9
 
 
107
  
 
 
0
  
 
 
(50

Equity in income (loss) from subsidiaries

  
 
6,911
  
 
 
(1,056
 
 
(1,299
 
 
(4,556
 
 
0
  

Gain (loss) on reinsurance transaction

  
 
0
  
 
 
0
  
 
 
199
  
 
 
0
  
 
 
199
  

Interest expense

  
 
(3,637
 
 
(944
 
 
0
  
 
 
0
  
 
 
(4,581

Other (expense) income, net

  
 
(1,350
 
 
9,632
  
 
 
485
  
 
 
(127
 
 
8,640
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  
 
8,331
  
 
 
6,279
  
 
 
(947
 
 
(4,556
 
 
9,107
  

Income tax expense

  
 
(1
 
 
(808
 
 
2
  
 
 
0
  
 
 
(807
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  
 
8,330
  
 
 
5,471
  
 
 
(945
 
 
(4,556
 
 
8,300
  

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

  
 
0
  
 
 
0
  
 
 
30
  
 
 
0
  
 
 
30
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SHLP

  
$
8,330
  
 
$
5,471
  
 
$
(915
 
$
(4,556
 
$
8,330
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

  
$
5,200
  
 
$
2,341
  
 
$
(945
 
$
(1,426
 
$
5,170
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

26


Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive income (Loss)

Nine Months Ended September 30, 2013

 

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

Revenues

  
$
332,157
  
 
$
242,345
  
 
$
16,077
  
 
$
0
  
 
$
590,579
  

Cost of sales

  
 
(271,041
 
 
(183,072
 
 
(1,022
 
 
366
  
 
 
(454,769
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  
 
61,116
  
 
 
59,273
  
 
 
15,055
  
 
 
366
  
 
 
135,810
  

Selling expenses

  
 
(20,519
 
 
(12,305
 
 
(4,469
 
 
0
  
 
 
(37,293

General and administrative expenses

  
 
(24,747
 
 
(13,285
 
 
(2,100
 
 
0
  
 
 
(40,132

Equity in income (loss) from unconsolidated joint ventures, net

  
 
(1,219
 
 
(12
 
 
461
  
 
 
0
  
 
 
(770

Equity in income (loss) from subsidiaries

  
 
44,761
  
 
 
(286
 
 
(2,154
 
 
(42,321
 
 
0
  

Gain (loss) on reinsurance transaction

  
 
0
  
 
 
0
  
 
 
1,599
  
 
 
0
  
 
 
1,599
  

Interest expense

  
 
(3,562
 
 
(1,413
 
 
0
  
 
 
0
  
 
 
(4,975

Other income (expense), net

  
 
(3,631
 
 
2,765
  
 
 
889
  
 
 
(366
 
 
(343
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  
 
52,199
  
 
 
34,737
  
 
 
9,281
  
 
 
(42,321
 
 
53,896
  

Income tax benefit (expense)

  
 
(3
 
 
(1,687
 
 
(11
 
 
0
  
 
 
(1,701
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  
 
52,196
  
 
 
33,050
  
 
 
9,270
  
 
 
(42,321
 
 
52,195
  

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

  
 
0
  
 
 
0
  
 
 
1
  
 
 
0
  
 
 
1
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SHLP

  
$
52,196
  
 
$
33,050
  
 
$
9,271
  
 
$
(42,321
 
$
52,196
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

  
$
52,448
  
 
$
33,302
  
 
$
9,270
  
 
$
(42,573
 
$
52,447
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)
Includes Shea Homes Funding Corp.; no significant activity occurred in 2013.

 

27


Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Loss

Nine Months Ended September 30, 2012

 

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

Revenues

  
$
265,816
  
 
$
113,413
  
 
$
5,263
  
 
$
0
  
 
$
384,492
  

Cost of sales

  
 
(213,448
 
 
(94,333
 
 
(743
 
 
286
  
 
 
(308,238
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  
 
52,368
  
 
 
19,080
  
 
 
4,520
  
 
 
286
  
 
 
76,254
  

Selling expenses

  
 
(17,267
 
 
(8,833
 
 
(3,747
 
 
0
  
 
 
(29,847

General and administrative expenses

  
 
(24,030
 
 
(9,628
 
 
(2,167
 
 
0
  
 
 
(35,825

Equity in income (loss) from unconsolidated joint ventures, net

  
 
(9
 
 
(40
 
 
383
  
 
 
0
  
 
 
334
  

Equity in income (loss) from subsidiaries

  
 
4,121
  
 
 
(11,443
 
 
(3,742
 
 
11,064
  
 
 
0
  

Gain (loss) on reinsurance transaction

  
 
0
  
 
 
0
  
 
 
(7,168
 
 
0
  
 
 
(7,168

Interest expense

  
 
(15,106
 
 
(1,668
 
 
(4
 
 
0
  
 
 
(16,778

Other income (expense), net

  
 
(4,253
 
 
12,845
  
 
 
1,609
  
 
 
(286
 
 
9,915
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  
 
(4,176
 
 
313
  
 
 
(10,316
 
 
11,064
  
 
 
(3,115

Income tax benefit (expense)

  
 
(6
 
 
(894
 
 
(3
 
 
0
  
 
 
(903
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  
 
(4,182
 
 
(581
 
 
(10,319
 
 
11,064
  
 
 
(4,018

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

  
 
0
  
 
 
0
  
 
 
(164
 
 
0
  
 
 
(164
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SHLP

  
$
(4,182
 
$
(581
 
$
(10,483
 
$
11,064
  
 
$
(4,182
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

  
$
(6,510
 
$
(2,909
 
$
(10,319
 
$
13,392
  
 
$
(6,346
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

28


Table of Contents

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2013

 

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

Operating activities

  
 
 
 
 

Net cash provided by (used in) operating activities

  
$
(116,651
 
$
(22,609
 
$
10,063
  
 
$
4,748
  
 
$
(124,449
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities

  
 
 
 
 

Investments in unconsolidated joint ventures

  
 
(8,342
 
 
(194
 
 
(11,602
 
 
0
  
 
 
(20,138

Other investing activities

  
 
317
  
 
 
6,273
  
 
 
3,432
  
 
 
0
  
 
 
10,022
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

  
 
(8,025
 
 
6,079
  
 
 
(8,170
 
 
0
  
 
 
(10,116
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

  
 
 
 
 

Intercompany

  
 
38,421
  
 
 
(27,151
 
 
(6,522
 
 
(4,748
 
 
0
  

Principal payments to financial institutions and others

  
 
(1,993
 
 
0
  
 
 
0
  
 
 
0
  
 
 
(1,993
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  
 
36,428
  
 
 
(27,151
 
 
(6,522
 
 
(4,748
 
 
(1,993
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

  
 
(88,248
 
 
(43,681
 
 
(4,629
 
 
0
  
 
 
(136,558

Cash and cash equivalents at beginning of period

  
 
216,914
  
 
 
48,895
  
 
 
13,947
  
 
 
0
  
 
 
279,756
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  
$
128,666
  
 
$
5,214
  
 
$
9,318
  
 
$
0
  
 
$
143,198
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)
Includes Shea Homes Funding Corp.; no significant activity occurred in 2013.

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2012

 

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

Operating activities

  
 
 
 
 

Net cash (used in) provided by operating activities

  
$
(19,591
 
$
(92,559
 
$
23,602
  
 
$
1,711
  
 
$
(86,837
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities

  
 
 
 
 

Proceeds from sale of available-for-sale investments

  
 
0
  
 
 
23,954
  
 
 
0
  
 
 
0
  
 
 
23,954
  

Other investing activities

  
 
94
  
 
 
1,334
  
 
 
(964
 
 
0
  
 
 
464
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

  
 
94
  
 
 
25,288
  
 
 
(964
 
 
0
  
 
 
24,418
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

  
 
 
 
 

Intercompany

  
 
10,877
  
 
 
15,799
  
 
 
(24,965
 
 
(1,711
 
 
0
  

Other financing activities

  
 
(1,342
 
 
0
  
 
 
1,035
  
 
 
0
  
 
 
(307
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  
 
9,535
  
 
 
15,799
  
 
 
(23,930
 
 
(1,711
 
 
(307
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

  
 
(9,962
 
 
(51,472
 
 
(1,292
 
 
0
  
 
 
(62,726

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

  
$
147,549
  
 
$
44,628
  
 
$
13,463
  
 
$
0
  
 
$
205,640
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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Table of Contents

19. Subsequent Event

On October 31, 2013, we completed a solicitation of consents (the “Consent Solicitation”) and obtained the consent of holders of a majority of the outstanding aggregate principal amount of the Secured Notes to amend (the “Amendment”) the Indenture to allow us to replace our $75.0 million letter of credit facility with one or more revolving credit facilities totaling $125.0 million (the “New Credit Facilities”). The Amendment also reset the Indenture’s restricted payment basket by replacing April 1, 2011 with October 1, 2013 as the date from which the amount of our consolidated Net Income, as defined in the Indenture, is measured when determining the amount of permitted Restricted Payments, as defined in the Indenture, that can be made under the Indenture. In addition, the Consent Solicitation permits the Company to amend and / or amend and restate the Indenture’s related security documents and the intercreditor agreement to facilitate the Company’s entry into the New Credit Facilities. On November 4, 2013 we executed a supplemental indenture to amend the Indenture to reflect the Amendment.

 

30


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 our Annual Report on Form 10-K for the year ended December 31, 2012.

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 most of 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 and Orange Counties, and the Inland Empire;

 

 
 

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

 

 
 

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

 

 
 

Mountain West, comprised of communities in Colorado and Washington;

 

 
 

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

 

 
 

Other, comprised of communities in Florida.

The company announced last quarter it is entering the Houston, Texas housing market. As a start-up operation, we expect to deliver our first homes in 2014. Houston is included in our South West reporting segment.

In accordance with ASC 280, 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 and the deductibles and retentions under those third party policies. Results of our insurance brokerage services business are also included in our Corporate segment.

Overview

Generally, demand for new homes remains healthy, however, during the third quarter of 2013, the housing market experienced a slowdown as a result of higher mortgage interest rates, decreased consumer confidence which we believe is a result of the federal government shutdown and policy uncertainty surrounding the debt ceiling increase, as well as normal seasonal slowdown. We continue to believe, however, that the fundamentals remain in place for a continued recovery. For the three and nine months ended September 30, 2013, as compared to the three and nine months ended September 30, 2012, net homes sales orders decreased 18% and 9%, respectively, primarily as a result of the issues discussed above as well as a lower number of active selling communities. Net home orders per community decreased 16% for the three months ended September 30, 2013, but increased 5% for the nine months ended September 30, 2013 as compared to the three and nine months ended September 30, 2012. Homes closed increased 50% and 44%, respectively, and homebuilding revenues increased 63% and 54%, respectively, primarily driven by the 98% higher backlog at the beginning of 2013 versus 2012. Gross margin as a percentage of revenues improved from 21.3% to 23.4%, for the three months ended September 30, 2013 compared to the prior year period and from 19.8% to 23.0%, for the nine months ended September 30, 2013 compared to the prior year period. We have $145.4 million in cash, cash equivalents and restricted cash and expect to continue to invest in land opportunities in desirable locations to supplement our existing land positions.

 

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Table of Contents
 
  
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
  
2013
 
 
2012
 
 
%
Change
 
 
2013
 
 
2012
 
 
%
Change
 
 
  
(Dollars in thousands)
 

Revenues

  
$
238,309
  
 
$
146,421
  
 
 
63
 
$
590,579
  
 
$
384,492
  
 
 
54

Cost of sales

  
 
(182,461
 
 
(115,225
 
 
58
  
 
 
(454,769
 
 
(308,238
 
 
48
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  
 
55,848
  
 
 
31,196
  
 
 
79
  
 
 
135,810
  
 
 
76,254
  
 
 
78
  

Selling expenses

  
 
(14,291
 
 
(10,296
 
 
39
  
 
 
(37,293
 
 
(29,847
 
 
25
  

General and administrative expenses

  
 
(14,097
 
 
(16,001
 
 
(12
 
 
(40,132
 
 
(35,825
 
 
12
  

Equity in income (loss) from unconsolidated joint ventures

  
 
(616
 
 
(50
 
 
1132
  
 
 
(770
 
 
334
  
 
 
—  
  

Gain (loss) on reinsurance transaction

  
 
1,758
  
 
 
199
  
 
 
783
  
 
 
1,599
  
 
 
(7,168
 
 
—  
  

Interest expense

  
 
(145
 
 
(4,581
 
 
(97
 
 
(4,975
 
 
(16,778
 
 
(70

Other (expense) income, net

  
 
(1,350
 
 
8,640
  
 
 
—  
  
 
 
(343
 
 
9,915
  
 
 
—  
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  
 
27,107
  
 
 
9,107
  
 
 
198
  
 
 
53,896
  
 
 
(3,115
 
 
—  
  

Income tax benefit (expense)

  
 
(1,281
 
 
(807
 
 
59
  
 
 
(1,701
 
 
(903
 
 
88
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  
 
25,826
  
 
 
8,300
  
 
 
211
  
 
 
52,195
  
 
 
(4,018
 
 
—  
  

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

  
 
(2
 
 
30
  
 
 
—  
  
 
 
1
  
 
 
(164
 
 
—  
 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SHLP

  
$
25,824
  
 
$
8,330
  
 
 
210 
 
$
52,196
  
 
$
(4,182
 
 
—  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended September 30, 2013, net income attributable to SHLP was $25.8 million compared to $8.3 million for the three months ended September 30, 2012. This increase in income was primarily attributable to a $24.7 million improvement in gross margins (from higher revenues and gross margin percentage), a $4.4 million decrease in interest expense, a $1.9 million decrease in general and administrative expenses (primarily in legal expenses) and a $1.6 million increase in the gain on our reinsurance transaction, partially offset by a $10.0 million decrease in other income (expense) (from decreased income from the sale of marketable securities) and a $4.0 million increase in selling expenses (from increased home closings).

For the nine months ended September 30, 2013, net income (loss) attributable to SHLP was $52.2 million compared to $(4.2) million for the nine months ended September 30, 2012. This increase in income was primarily attributable to a $59.6 million improvement in gross margins (from higher revenues and gross margin percentage), a $11.8 million decrease in interest expense and a $8.8 million decrease in the loss on our reinsurance transaction, partially offset by a $10.3 million decrease in other income (expense) (from decreased income on the sale of marketable securities), a $7.4 million increase in selling expenses (from increased home closings) and a $4.3 million increase in general and administrative expenses (from increased compensation expenses).

Seasonality

Historically, the homebuilding industry experiences seasonal fluctuations. We typically experience the highest home sales order activity in spring and summer, although this activity is also highly dependent on the number of active selling communities, timing of community openings and other market factors. Since it typically takes three to eight months to construct a new home, we close more homes in the second half of the year as spring and summer home sales orders convert to home closings. 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 nine months ended September 30, 2013 are not necessarily indicative of results expected for the year ended December 31, 2013.

Revenues

Revenues are derived primarily from home closings 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 corporate, insurance brokerage services, and our captive insurance company, Partners Insurance Company (“PIC”), are in other revenues.

 

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Table of Contents
 
  
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
  
2013
 
  
2012
 
  
%
Change
 
 
2013
 
  
2012
 
  
%
Change
 
 
  
(Dollars in thousands)
 

Revenues:

  
  
  
 
  
  

House revenues

  
$
234,938
  
  
$
132,220
  
  
 
78
 
$
578,817
  
  
$
360,238
  
  
 
61

Land revenues

  
 
2,750
  
  
 
13,071
  
  
 
(79
 
 
9,891
  
  
 
21,773
  
  
 
(55

Other homebuilding revenues

  
 
391
  
  
 
883
  
  
 
(56
 
 
1,184
  
  
 
1,743
  
  
 
(32
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

  
 
238,079
  
  
 
146,174
  
  
 
63
  
 
 
589,892
  
  
 
383,754
  
  
 
54
  

Other revenues

  
 
230
  
  
 
247
  
  
 
(7
 
 
687
  
  
 
738
  
  
 
(7
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total revenues

  
$
238,309
  
  
$
146,421
  
  
 
63
 
$
590,579
  
  
$
384,492
  
  
 
54
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

For the three months ended September 30, 2013, total revenues were $238.3 million compared to $146.4 million for the three months ended September 30, 2012. This increase was primarily attributable to a 50% increase in homes closed and a 18% increase in the average selling price (“ASP”) of homes closed.

For the nine months ended September 30, 2013, total revenues were $590.6 million compared to $384.5 million for the nine months ended September 30, 2012. This increase was primarily attributable to a 44% increase in homes closed and a 12% increase in the ASP of homes closed.

For the three and nine months ended September 30, 2013 and 2012, homebuilding revenues by segment were as follows:

 

 
  
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
  
2013
 
  
2012
 
  
%
Change
 
 
2013
 
  
2012
 
  
%
Change
 
 
  
(Dollars in thousands)
 

Southern California:

  
  
  
 
  
  

House revenues

  
$
39,841
  
  
$
31,126
  
  
 
28
 
$
133,940
  
  
$
84,541
  
  
 
58

Land revenues

  
 
0
  
  
 
559
  
  
 
0
  
 
 
2,175
  
  
 
3,617
  
  
 
(40

Other homebuilding revenues

  
 
6
  
  
 
7
  
  
 
(14
 
 
20
  
  
 
18
  
  
 
11
  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

  
$
39,847
  
  
$
31,692
  
  
 
26
 
$
136,135
  
  
$
88,176
  
  
 
54
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

San Diego:

  
  
  
 
  
  

House revenues

  
$
40,532
  
  
$
10,808
  
  
 
275
 
$
81,515
  
  
$
35,050
  
  
 
133

Land revenues

  
 
0
  
  
 
13
  
  
 
0
  
 
 
0
  
  
 
13
  
  
 
0
  

Other homebuilding revenues

  
 
2
  
  
 
139
  
  
 
(99
 
 
8
  
  
 
184
  
  
 
(96
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

  
$
40,534
  
  
$
10,960
  
  
 
270
 
$
81,523
  
  
$
35,247
  
  
 
131
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Northern California:

  
  
  
 
  
  

House revenues

  
$
70,824
  
  
$
28,978
  
  
 
144
 
$
151,615
  
  
$
85,043
  
  
 
78

Land revenues

  
 
0
  
  
 
3,124
  
  
 
0
  
 
 
0
  
  
 
3,124
  
  
 
0
  

Other homebuilding revenues

  
 
165
  
  
 
402
  
  
 
(59
 
 
505
  
  
 
733
  
  
 
(31
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

  
$
70,989
  
  
$
32,504
  
  
 
118
 
$
152,120
  
  
$
88,900
  
  
 
71
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Mountain West:

  
  
  
 
  
  

House revenues

  
$
44,128
  
  
$
25,391
  
  
 
74
 
$
101,169
  
  
$
71,379
  
  
 
42

Land revenues

  
 
2,750
  
  
 
9,375
  
  
 
(71
 
 
7,716
  
  
 
15,019
  
  
 
(49

Other homebuilding revenues

  
 
83
  
  
 
92
  
  
 
(10
 
 
265
  
  
 
266
  
  
 
0
  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

  
$
46,961
  
  
$
34,858
  
  
 
35
 
$
109,150
  
  
$
86,664
  
  
 
26
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

South West:

  
  
  
 
  
  

House revenues

  
$
37,336
  
  
$
34,196
  
  
 
9
 
$
104,771
  
  
$
80,112
  
  
 
31

Land revenues

  
 
0
  
  
 
0
  
  
 
0
  
 
 
0
  
  
 
0
  
  
 
0
  

Other homebuilding revenues

  
 
135
  
  
 
243
  
  
 
(44
 
 
386
  
  
 
542
  
  
 
(29
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

  
$
37,471
  
  
$
34,439
  
  
 
9
 
$
105,157
  
  
$
80,654
  
  
 
30
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Other:

  
  
  
 
  
  

House revenues

  
$
2,277
  
  
$
1,721
  
  
 
32
 
$
5,807
  
  
$
4,113
  
  
 
41

Land revenues

  
 
0
  
  
 
0
  
  
 
0
  
 
 
0
  
  
 
0
  
  
 
0
  

Other homebuilding revenues

  
 
0
  
  
 
0
  
  
 
0
  
 
 
0
  
  
 
0
  
  
 
0
  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

  
$
2,277
  
  
$
1,721
  
  
 
32
 
$
5,807
  
  
$
4,113
  
  
 
41
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

For the three months ended September 30, 2013, total homebuilding revenues were $238.1 million compared to $146.2 million for the three months ended September 30, 2012. This increase was primarily attributable to a 50% increase in homes closed and an 18% increase in the ASP of homes closed. The increase in home closings for the period was driven primarily by the 98% higher beginning of the year backlog at December 31, 2012 versus December 31, 2011. The increase in the ASP of homes closed was primarily attributable to the general increase in new home prices in all of our markets, combined with the delivery of larger, more expensive homes in certain of our markets (primarily Southern California), net of a shift to higher density, lower priced homes in certain markets (primarily Northern California).

For the nine months ended September 30, 2013, total homebuilding revenues were $589.9 million compared to $383.8 million for the nine months ended September 30, 2012. This increase was primarily attributable to a 44% increase in homes closed and a 12% increase in the ASP of homes closed. The increase in home closings for the period was driven primarily by the 98% higher beginning of the year backlog at December 31, 2012 versus December 31, 2011. The increase in the ASP of homes closed was primarily attributable to the general increase in new home prices in all of our markets, combined with the delivery of larger, more expensive homes in certain of our markets (primarily Southern California), net of a shift to higher density, lower priced homes in certain markets (primarily Northern California).

For the three and nine months ended September 30, 2013 and 2012, homes closed, by segment were as follows:

 

 
  
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
  
2013
 
  
2012
 
  
%
Change
 
 
2013
 
  
2012
 
  
%
Change
 

Homes closed:

  
  
  
 
  
  

Southern California

  
 
48
  
  
 
57
  
  
 
(16
)% 
 
 
179
  
  
 
168
  
  
 
7

San Diego

  
 
85
  
  
 
25
  
  
 
240
  
 
 
176
  
  
 
71
  
  
 
148
  

Northern California

  
 
138
  
  
 
55
  
  
 
151
  
 
 
315
  
  
 
170
  
  
 
85
  

Mountain West

  
 
98
  
  
 
58
  
  
 
69
  
 
 
229
  
  
 
160
  
  
 
43
  

South West

  
 
116
  
  
 
125
  
  
 
(7
 
 
333
  
  
 
285
  
  
 
17
  

Other

  
 
8
  
  
 
8
  
  
 
0
  
 
 
23
  
  
 
19
  
  
 
21
  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total consolidated

  
 
493
  
  
 
328
  
  
 
50
  
 
 
1,255
  
  
 
873
  
  
 
44
  

Unconsolidated joint ventures

  
 
42
  
  
 
35
  
  
 
20
  
 
 
120
  
  
 
92
  
  
 
30
  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total homes closed

  
 
535
  
  
 
363
  
  
 
47
 
 
1,375
  
  
 
965
  
  
 
42
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

For the three and nine months ended September 30, 2013 and 2012, the ASP of homes closed, by segment were as follows:

 

 
  
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
  
2013
 
  
2012
 
  
%
Change
 
 
2013
 
  
2012
 
  
%
Change
 

ASP of homes closed:

  
  
  
 
  
  

Southern California

  
$
830,021
  
  
$
546,070
  
  
 
52
 
$
748,268
  
  
$
503,220
  
  
 
49

San Diego

  
 
476,847
  
  
 
432,320
  
  
 
10
  
 
 
463,153
  
  
 
493,662
  
  
 
(6

Northern California

  
 
513,217
  
  
 
526,873
  
  
 
(3
 
 
481,317
  
  
 
500,253
  
  
 
(4

Mountain West

  
 
450,286
  
  
 
437,776
  
  
 
3
  
 
 
441,786
  
  
 
446,119
  
  
 
(1

South West

  
 
321,862
  
  
 
273,568
  
  
 
18
  
 
 
314,628
  
  
 
281,095
  
  
 
12
  

Other

  
 
284,625
  
  
 
215,125
  
  
 
32
  
 
 
252,478
  
  
 
216,474
  
  
 
17
  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total consolidated

  
 
476,548
  
  
 
403,110
  
  
 
18
  
 
 
461,209
  
  
 
412,644
  
  
 
12
  

Unconsolidated joint ventures

  
 
325,714
  
  
 
321,829
  
  
 
1
  
 
 
325,200
  
  
 
309,826
  
  
 
5