Attached files

file filename
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Shea Homes Limited Partnershipd332604dex322.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Shea Homes Limited Partnershipd332604dex311.htm
EX-12.1 - STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - Shea Homes Limited Partnershipd332604dex121.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Shea Homes Limited Partnershipd332604dex312.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Shea Homes Limited Partnershipd332604dex321.htm
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 March 31, 2012

OR

 

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

Commission file number 333-177328 

SHEA HOMES LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

 

California   95-4240219
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

655 Brea Canyon Road, Walnut, CA 91789

 

(Address of principal executive offices)

 

92618-2215

 

(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          No         

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

 

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

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


Table of Contents

 

SHEA HOMES LIMITED PARTNERSHIP

FORM 10-Q

INDEX

 

                   Page No.  

PART 1.

  Financial Information   
  ITEM 1.    Financial Statements   
     Condensed Consolidated Balance Sheets at March 31, 2012 (Unaudited) and December 31, 2011      1   
     Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2012 and 2011.      2   
    

Unaudited Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2012 and 2011

     3   
     Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011      4   
     Notes  to Unaudited Condensed Consolidated Financial Statements at March 31, 2012 and December 31, 2011 and for the Three Months Ended March 31, 2012 and 2011      5   
  ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      30   
  ITEM 3.    Quantitative and Qualitative Disclosures About Market Risk      46   
  ITEM 4.    Controls and Procedures      46   

PART 2.

  Other Information   
  ITEM 1.    Legal Proceedings      48   
  ITEM 1A.    Risk Factors      48   
  ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds      60   
  ITEM 3.    Defaults Upon Senior Securities      60   
  ITEM 4.    Removed and Reserved      61   
  ITEM 5.    Other Information      61   
  ITEM 6.    Exhibits      62   

SIGNATURES

           63   


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)

 

     March 31,
2012
     December 31,
2011
 
     (unaudited)         

Assets

     

Cash and cash equivalents

   $ 278,338       $ 268,366   

Restricted cash

     13,886         13,718   

Investments

     34,374         32,428   

Accounts and other receivables, net

     112,267         120,689   

Receivables from related parties, net

     35,337         60,223   

Inventory

     770,734         783,810   

Investments in joint ventures

     17,558         17,870   

Property and equipment, net

     2,005         1,992   

Other assets, net

     28,201         29,020   
  

 

 

    

 

 

 

Total assets

   $ 1,292,700       $ 1,328,116   
  

 

 

    

 

 

 

Liabilities and equity

     

Liabilities:

     

Notes payable

   $ 751,374       $ 752,056   

Payables to related parties

     3,332         2,343   

Accounts payable

     36,005         46,063   

Other liabilities

     211,158         199,651   
  

 

 

    

 

 

 

Total liabilities

     1,001,869         1,000,113   

Equity:

     

SHLP equity:

     

Owners’ equity

     282,520         294,511   

Accumulated other comprehensive income

     7,835         6,392   
  

 

 

    

 

 

 

Total SHLP equity

     290,355         300,903   

Non-controlling interests

     476         27,100   
  

 

 

    

 

 

 

Total equity

     290,831         328,003   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 1,292,700       $ 1,328,116   
  

 

 

    

 

 

 

See accompanying notes

 

1


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  
     (unaudited)     (unaudited)  

Revenues

   $ 105,603      $ 74,059   

Cost of sales

     (85,035     (63,446
  

 

 

   

 

 

 

Gross margin

     20,568        10,613   

Selling expenses

     (9,352     (8,218

General and administrative expenses

     (8,251     (8,223

Equity in income (loss) from joint ventures, net

     67        (393

Interest expense

     (6,288     (3,951

Other income, net

     2,306        1,631   
  

 

 

   

 

 

 

Loss before income taxes

     (950     (8,541

Income tax benefit

     752        341   
  

 

 

   

 

 

 

Net loss

     (198     (8,200

Less: Net income attributable to non-controlling interests

     (213     (89
  

 

 

   

 

 

 

Net loss attributable to SHLP

   $ (411   $ (8,289
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ 1,245      $ (7,520
  

 

 

   

 

 

 

See accompanying notes

 

2


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Changes in Equity

(In thousands)

 

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

Balance, December 31, 2010

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

Comprehensive loss:

                 

Net (loss) income

    (6,496     0        (84     (1,709     (8,289     0        (8,289     89        (8,200

Change in unrealized gains on investments, net

    0        0        0        0        0        680        680        0        680   
             

 

 

   

 

 

   

 

 

 

Total comprehensive loss

                (7,609     89        (7,520

Distributions to non-controlling interests

    0        0        0        0        0        0        0        (90     (90
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2011 (unaudited)

  $ 65,334      $ 194,240      $ 121,808      $ 17,192      $ 398,574      $ 6,043      $ 404,617      $ 20,086      $ 424,703   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

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

Comprehensive income:

                 

Net (loss) income

    0        (411     0        0        (411     0        (411     213        (198

Change in unrealized gains on investments, net

    0        0        0        0        0        1,443        1,443        0        1,443   
             

 

 

   

 

 

   

 

 

 

Total comprehensive income

                1,032        213        1,245   

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

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

Contributions from non-controlling interests

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

Distributions to non-controlling interests

    0        0        0        0        0        0        0        (344     (344
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2012 (unaudited)

  $ 1      $ 161,564      $ 120,955      $ 0      $ 282,520      $ 7,835      $ 290,355      $ 476      $ 290,831   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

3


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Cash Flows

(In thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  
     (unaudited)     (unaudited)  

Operating activities

    

Net loss

   $ (198   $ (8,200

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

    

Equity in (income) loss from joint ventures

     (67     393   

Net gain on sale of available-for-sale investments

     (23     (139

Depreciation and amortization expense

     1,812        1,547   

Impairment of inventory

     0        618   

Net interest capitalized on investment in joint ventures

     (177     (440

Distributions of earnings from joint ventures

     500        0   

Changes in operating assets and liabilities:

    

Restricted cash

     (168     (1,092

Receivables and other assets

     8,749        1,751   

Inventory

     (3,908     (30,576

Payables and other liabilities

     3,240        (2,032
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     9,760        (38,170

Investing activities

    

Proceeds from sale of available-for-sale investments

     203        294   

Net (increase) decrease in promissory notes from related parties

     (108     11,327   

Investments in joint ventures

     (450     (1,148

Distributions from joint ventures

     3        700   

Other investing activities

     (69     (238
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (421     10,935   

Financing activities

    

Repayments on revolving lines of credit

     0        (848

Principal payments to financial institutions and others

     (601     (20,439

Accrued interest on notes payable

     0        1,368   

Amortization of notes payable discount

     0        3,797   

Contributions from non-controlling interests

     1,746        0   

Distributions to non-controlling interests

     (344     (90

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

     (168     0   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     633        (16,212
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     9,972        (43,447

Cash and cash equivalents at beginning of period

     268,366        166,874   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 278,338      $ 123,427   
  

 

 

   

 

 

 

See accompanying notes

 

4


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2012

1. Basis of Presentation

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

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

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

Organization

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

Nature of Operations

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

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

Seasonality

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

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

 

5


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

Use of Estimates

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

2. Summary of Significant Accounting Policies

Inventory

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

Semi-annually, or if there are indications of impairment, we perform a detailed budget and cash flow review of our real estate assets to determine whether the estimated remaining undiscounted future cash flows of the community are more or less than the asset’s carrying value. If the undiscounted cash flows are more than the asset’s carrying value, no impairment adjustment is required. However, if the undiscounted cash flows are less than the asset’s carrying value, the asset is deemed impaired and is written down to fair value. These impairment evaluations require us to make estimates and assumptions regarding future conditions, including timing and amounts of development costs and sales prices of real estate assets, to determine if expected future undiscounted cash flows will be sufficient to recover the asset’s carrying value.

When estimating undiscounted cash flows of a community, we make various assumptions, including: (i) expected sales prices and sales incentives to be offered, including the number of homes available, pricing and incentives being offered by us or other builders in other communities, and future sales price adjustments based on market and economic trends; (ii) expected sales pace and cancellation rates based on local housing market conditions, competition and historical trends; (iii) costs expended to date and expected to be incurred, including, but not limited to, land and land development costs, home construction costs, interest costs, indirect construction and overhead costs, and selling and marketing costs; (iv) alternative product offerings that may be offered that could have an impact on sales pace, sales price and/or building costs; and (v) alternative uses for the property.

Many assumptions are interdependent and a change in one may require a corresponding change to other assumptions. For example, increasing or decreasing sales absorption rates has a direct impact on the estimated per unit sales price of a home, the level of time sensitive costs (such as indirect construction, overhead and carrying costs), and selling and marketing costs (such as model maintenance costs and advertising costs). Depending on the underlying objective of the community, assumptions could have a significant impact on the projected cash flow analysis. For example, if our objective is to preserve operating margins, our cash flow analysis will be different than if the objective is to increase sales. These objectives may vary significantly from community to community and over time.

If assets are considered impaired, impairment is determined by the amount the asset’s carrying value exceeds its fair value. Fair value is determined based on estimated future cash flows discounted for inherent risks associated with real estate assets or other valuation techniques. These discounted cash flows are impacted by expected risk based on estimated land development, construction and delivery timelines; market risk of price erosion; uncertainty of development or construction cost increases; and other risks specific to the asset or market conditions where the asset is located when assessment is made. These factors are specific to each community and may vary among communities. The discount rate used in determining each asset’s fair value depends on the community’s projected life and development stage. We generally use discount rates ranging from 10% to 25%, subject to perceived risks associated with the community’s cash flow streams relative to its inventory.

Completed Operations Claim Costs

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

 

6


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

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

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

The actuarial analyses that determined 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 the inherent uncertainty related to each of these factors, periodic changes to such factors based on updated relevant information could result in actual costs to differ significantly from estimated costs.

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

Revenues

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

Income Taxes

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

SHI and PIC are C corporations. Federal and state income taxes are provided for these entities in accordance with the provisions of ASC 740. The provision for, or benefit from, income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect the year in which differences are expected to reverse. Deferred tax assets are evaluated to determine whether a valuation allowance should be established based on its determination of whether it is more likely than not some or all of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends primarily on generation of future taxable income during periods in which those temporary differences become deductible. Judgment is required 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 May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, (“ASU 2011-04”). ASU 2011-04 amends ASC 820, Fair Value Measurements (“ASC 820”), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies application of existing fair value measurement and expands the ASC 820 disclosure requirements, particularly for Level 3 fair value measurements. The Company adopted ASU 2011-04 effective January 1, 2012, which did not have a material impact on its consolidated financial position or results of operations.

 

7


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

3. Restricted Cash

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

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

4. Investments

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

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

 

     March 31, 2012  
     Cost /
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  
     (In thousands)  

Debt securities:

           

Corporate obligations

   $ 20,520       $ 260       $ 0       $ 20,780   

Mortgage/asset-backed securities

     69         9         0         78   

Private debt obligations (a)

     1,726         11,780         0         13,506   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     22,315         12,049         0         34,364   

Equity securities

     4         6         0         10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 22,319       $ 12,055       $ 0       $ 34,374   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Debt securities:

          

Corporate obligations

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

Mortgage/asset-backed securities

     101         10         0        111   

Private debt obligations (a)

     1,742         9,700         (2     11,440   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     22,590         9,868         (41     32,417   

Equity securities

     4         7         0        11   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments

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

 

 

    

 

 

    

 

 

   

 

 

 

 

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

For the three months ended March 31, 2012 and 2011, realized gains on available-for-sale securities were zero and $0.1 million, respectively, which were included in other income, net.

 

8


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

For the three months ended March 31, 2012, included in accumulated other comprehensive income (loss) were $2.2 million of unrealized gains and $(0.8) million of tax expense. For the three months ended March 31, 2011, included in accumulated other comprehensive income (loss) were $1.0 million of unrealized losses, reclassification adjustments for $0.1 million of realized gains and $(0.4) million of tax expense.

At March 31, 2012, the contractual maturities of debt securities classified as available-for-sale were as follows:

 

     March 31, 2012  
     Cost      Fair Value  
     (In thousands)  

Due in one year or less

   $ 20,100       $ 20,325   

Due after one year through five years

     438         524   

Due after five years through ten years

     920         5,895   

Due after ten years

     788         7,542   

Mortgage/asset-backed securities

     69         78   
  

 

 

    

 

 

 

Total

   $ 22,315       $ 34,364   
  

 

 

    

 

 

 

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

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

5. Fair Value Disclosures

ASC 820, Fair Value Measurement, defines fair value as the price that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date and requires assets and liabilities carried at fair value to be classified and disclosed in the following three categories:

 

   

Level 1 — Quoted prices for identical instruments in active markets

 

   

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at measurement date

 

   

Level 3 — Valuations derived from techniques where one or more significant inputs or significant value drivers are unobservable in active markets at measurement date

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

 

     March 31, 2012  

Description

   Level 1      Level 2      Level 3      Total  
     (In thousands)  

Debt securities

   $ 17,243       $ 4,540       $ 12,581       $ 34,364   

Equity securities

     0         10         0         10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 17,243       $ 4,550       $ 12,581       $ 34,374   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

9


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

     December 31, 2011  

Description

   Level 1      Level 2      Level 3      Total  
     (In thousands)   

Debt securities

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

Equity securities

     0         11         0         11   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

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

 

 

    

 

 

    

 

 

    

 

 

 

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

The Company uses a third-party service provider to value its Level 3 financial instruments. Significant changes in the pricing of these instruments are compared to activity of similar financial instruments, or general market conditions, for reasonableness. At March 31, 2012, the unobservable inputs used in the valuation of Level 3 financial instruments were as follows:

 

     Fair
Value
     Valuation
Technique
   Unobservable
Input
   Range
(Weighted  Average)
 
         Constant

prepayment
rate

     15% (15%)   

Private debt obligations

   $ 12,581       Discounted

cash flow

   Probability

of default

     2%   (2%)   
         Recovery

rate

     50% - 70% (66%)   

At March 31, 2012, the summary of changes in fair value of Level 3 financial instruments was as follows:

 

     Private Debt
Obligations
 
     (In thousands)   

Fair value at December 31, 2011

   $ 10,504   

Unrealized gains, included in other comprehensive income (loss)

     2,077   
  

 

 

 

Fair value at March 31, 2012

   $ 12,581   
  

 

 

 

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

 

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

$750,000 senior secured notes

   $ 750,000       $ 772,500       $ 750,000       $ 697,500   

Secured promissory notes

   $ 1,374       $ 1,374       $ 2,056       $ 2,056   

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

 

10


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

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

6. Accounts and Other Receivables, net

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

 

     March 31,
2012
    December 31,
2011
 
     (In thousands)  

Insurance receivables

   $ 103,980        $109,390   

Escrow receivables

     1,842        5,815   

Notes receivable

     4,001        3,566   

Other receivables

     5,460        4,937   

Reserve

     (3,016     (3,019
  

 

 

   

 

 

 

Total accounts and other receivables, net

   $ 112,267        $120,689   
  

 

 

   

 

 

 

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

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

7. Inventory

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

 

     March 31,
2012
     December 31,
2011
 
     (In thousands)  

Model homes

   $ 75,005       $ 82,339   

Completed homes for sale

     28,318         29,703   

Homes under construction

     122,581         97,952   

Lots available for construction

     305,405         282,292   

Land under development

     96,225         144,070   

Land held for future development

     127,135         129,247   

Land deposits and preacquisition costs

     16,065         18,207   
  

 

 

    

 

 

 

Total inventory

   $ 770,734       $ 783,810   
  

 

 

    

 

 

 

 

11


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

Impairment

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

For the three months ended March 31, 2012 and 2011, inventory impairment was as follows:

 

    Three Months Ended March 31,  
    2012     2011  
    (Dollars in thousands)  

Inventory impairment

  $ 0      $ 618   
 

 

 

   

 

 

 

Remaining carrying value of inventory impaired at end of period

  $ 0      $ 1,113   
 

 

 

   

 

 

 

Projects impaired

    0        1   
 

 

 

   

 

 

 

Projects evaluated for impairment (a)

    140        148   
 

 

 

   

 

 

 

 

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

Inventory impairment was included in cost of sales in the accompanying consolidated statements of operations and primarily attributable to lower home prices driven by increased incentives and price reductions required in response to weak demand and economic conditions, including record foreclosures, high unemployment, low consumer confidence and tighter mortgage credit standards.

Write-off of Deposits and Preacquisition Costs

Land deposits and preacquisition costs for potential acquisitions and land option contracts are included in inventory. When a potential acquisition or land option contract is abandoned, related deposits and preacquisition costs are written off to other income, net. For the three months ended March 31, 2012, write-offs of deposits and preacquisition costs were $0.3 million and no option lots were abandoned. For the three months ended March 31, 2011, write-offs of deposits and preacquisition costs were zero and no option lots were abandoned.

 

12


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

Interest Capitalization

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

For the three months ended March 31, 2012 and 2011, interest incurred, capitalized and expensed was as follows:

 

     Three Months Ended March 31,  
     2012     2011  
     (In thousands)  

Interest incurred

   $ 16,661      $ 19,662   
  

 

 

   

 

 

 

Interest expensed (a)

   $ 6,288      $ 3,951   
  

 

 

   

 

 

 

Interest capitalized as a cost of inventory

   $ 10,195      $ 15,271   
  

 

 

   

 

 

 

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

   $ (7,784   $ (5,808
  

 

 

   

 

 

 

Capitalized interest in ending inventory (b)

   $ 113,847      $ 115,414   
  

 

 

   

 

 

 

Interest capitalized as a cost of investments in joint ventures

   $ 177      $ 440   
  

 

 

   

 

 

 

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

   $ (177   $ (243
  

 

 

   

 

 

 

Capitalized interest in ending investments in joint ventures

   $ 0      $ 1,143   
  

 

 

   

 

 

 

 

(a) For the three months ended March 31, 2012 and 2011, assets qualifying for interest capitalization did not exceed debt; therefore, non-qualifying interest was expensed.
(b) Inventory impairment charges were recorded against total inventory of the respective community. Capitalized interest reflects the gross amount of capitalized interest as impairment charges recognized were generally not allocated to specific components of inventory.

8. Investments in Joint Ventures

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

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

For the three months ended March 31, 2012 and 2011, there were no impairments on investments in joint ventures.

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

 

13


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

At March 31, 2012, total unconsolidated joint ventures’ notes payable were $47.5 million and included $40.2 million of bank and seller financing notes payable secured by real property and $7.3 million of notes payables with joint ventures’ partners. At December 31, 2011, total unconsolidated joint ventures’ notes payable were $103.7 million and included $55.4 million of bank and seller financing notes payable secured by real property and $48.3 million of notes payable to joint ventures’ partners, of which $15.4 million was secured by real property. In addition, at March 31, 2012 and December 31, 2011, we had an indirect 12.3% effective ownership in a joint venture that had bank notes payable secured by real property of $7.2 million, in which we have not provided guarantees.

At March 31, 2012 and December 31, 2011, of the $40.2 million and $55.4 million in our unconsolidated joint ventures’ outstanding bank and seller financing secured notes payable, respectively, we provided guarantees on a joint and several basis for one secured note payable, which had an outstanding balance of $9.2 million and $11.2 million at March 31, 2012 and December 31, 2011, respectively. These guarantees include, but are not limited to, project completion and loan-to-value maintenance guarantees. At March 31, 2012 and December 31, 2011, we also had an indemnification agreement from our joint venture partner for 90% of this secured note payable’s outstanding balance of $9.2 million and $11.2 million, respectively. At March 31, 2012 and December 31, 2011, no liabilities were recorded for these guarantees as the fair value of secured real estate assets exceeded the outstanding notes payable. At March 31, 2012 and December 31, 2011, we have not provided guarantees on bank and seller financing secured notes payable of $31.0 million and $44.2 million, respectively, or on notes payable to joint ventures’ partners of $7.3 million and $48.3 million, respectively.

9. Variable Interest Entities

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

Joint Ventures

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

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

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

Land Option Contracts

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

 

14


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

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

At March 31, 2012, we had $6.0 million of refundable and non-refundable cash deposits associated with land option contracts with unconsolidated VIEs, having an $83.5 million remaining purchase price and subject to a specific performance clause. We also had $8.1 million of refundable and non-refundable cash deposits associated with land option contracts that were not with VIEs, having a $121.6 million remaining purchase price.

Our loss exposure on land option contracts consisted of non-refundable deposits, which were $14.0 million and $14.2 million at March 31, 2012 and December 31, 2011, respectively, and were included in inventory in the consolidated balance sheets.

10. Other Assets, Net

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

 

     March 31,
2012
     December 31,
2011
 
     (In thousands)  

Income tax receivables

   $ 5,003       $ 7,473   

Prepaid professional fees

     3,832         3,695   

Prepaid loan fees

     7,475         7,738   

Prepaid bank fees

     540         657   

Deposits in lieu of bonds and letters of credit

     8,495         6,439   

Prepaid insurance

     1,865         1,970   

Other

     991         1,048   
  

 

 

    

 

 

 

Total other assets, net

   $ 28,201       $ 29,020   
  

 

 

    

 

 

 

Prepaid Professional and Loan Fees

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

Deposits in Lieu of Bonds and Letters of Credit

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

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

 

15


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

11. Notes Payable

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

 

     March 31,
2012
     December 31,
2011
 
     (In thousands)  

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

   $ 750,000       $ 750,000   

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

     1,374         2,056   
  

 

 

    

 

 

 

Total notes payable

   $ 751,374       $ 752,056   
  

 

 

    

 

 

 

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

The Secured Notes were issued pursuant to Rule 144A and Regulation S, with registration rights. The Secured Notes bear interest at 8.625% paid semi-annually on May 15 and November 15, and do not require principal payments until maturity on May 15, 2019. At March 31, 2012 and December 31, 2011, accrued interest was $24.3 million and $8.1 million, respectively.

Holders of the Secured Notes are entitled to the benefits of a registration rights agreement dated November 14, 2011 (“Registration Rights Agreement”), between the Company and the initial purchasers listed therein. Pursuant to the Registration Rights Agreement, we agreed to file a registration statement with the SEC for an offer to exchange the Secured Notes for a new issuance of substantially identical notes issued under the Securities Act on or before 180 days after May 10, 2011, and to consummate the exchange offer registered thereby on or before 360 days after May 10, 2011. We completed the registration of the Secured Notes with the SEC and the exchange of Secured Notes issued under the Securities Act on May 4, 2012.

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

 

16


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

12. Other Liabilities

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

 

     March 31,
2012
     December 31,
2011
 
     (In thousands)  

Completed operations

   $ 103,980       $ 109,390   

Warranty reserves

     16,660         17,358   

Deferred revenue

     18,846         20,329   

Provisions for closed homes/communities

     11,281         13,156   

Deposits

     11,592         7,766   

Legal reserves

     6,980         5,824   

Accrued interest

     24,258         8,122   

Accrued compensation and benefits

     2,880         2,109   

Distributions payable

     3,164         3,344   

Deficit Distributions (see Note 8)

     903         928   

Other

     10,614         11,325   
  

 

 

    

 

 

 

Total other liabilities

   $ 211,158       $ 199,651   
  

 

 

    

 

 

 

Completed Operations

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

For the three months ended March 31, 2012 and 2011, changes in completed operations were as follows:

 

     Three Months Ended
March 31,
 
     2012     2011  
     (In thousands)  

Insured completed operations

    

Balance, beginning of the period

   $ 109,390      $ 102,860   

Reserves provided (relieved)

     1,391        (1,344

Insurance purchased

     0        16,520   

Claims paid

     (6,801     (1,097
  

 

 

   

 

 

 

Balance, end of the period

     103,980        116,939   
  

 

 

   

 

 

 

Self-insured completed operations

    

Balance, beginning of the period

     0        15,613   

Reserves provided

     0        907   

Insurance purchased

     0        (16,520
  

 

 

   

 

 

 

Balance, end of the period

     0        0   
  

 

 

   

 

 

 

Total completed operations

   $ 103,980      $ 116,939   
  

 

 

   

 

 

 

 

17


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

Reserves provided for self-insured completed operations are included in cost of sales. Reserves provided (relieved) for insured completed operations are offset by changes in insurance receivables (see Note 6), however, premiums paid for insured completed operations are included in cost of sales. For actual completed operations claims and estimates of completed operations claims incurred but not reported, we estimate and record insurance receivables under applicable policies when recovery is probable. At March 31, 2012 and December 31, 2011, insurance receivables were $104.0 million and $109.4 million, respectively.

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

Warranty Reserve

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

For the three months ended March 31, 2012 and 2011, changes in warranty liability were as follows:

 

     Three Months Ended
March 31,
 
     2012     2011  
     (In thousands)  

Balance, beginning of the period

   $ 17,358      $ 16,238   

Provision for warranties

     1,475        1,037   

Warranty costs paid

     (2,173     (2,172
  

 

 

   

 

 

 

Balance, end of the period

   $ 16,660      $ 15,103   
  

 

 

   

 

 

 

Deferred Revenue

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

Completed operations claims were previously insured through PIC for policy years August 1, 2001 to July 31, 2009. 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, and its completed operations claims from August 1, 2005 to July 31, 2007. Concurrently, JFSCI entered into insurance arrangements with unrelated third-party insurance carriers to insure these programs. As a result of this novation, the $19.2 million gain was deferred in these consolidated financial statements and will be recognized as income (expense) when related claims are paid or actuarial estimates are adjusted. At March 31, 2012 and December 31, 2011, the remaining deferred revenue was $15.0 million and $15.6 million, respectively. For the three months ended March 31, 2012 and 2011, we recognized $0.6 million and $0.1 million, respectively, of this deferral as income, which was included in other income, net.

Second, PIC entered into reinsurance agreements with various unrelated reinsurers that reinsured 100% of the completed operations claims coverage from August 1, 2001 to July 31, 2005. As a result of the reinsurance, the $15.6 million gain was deferred in these consolidated financial statements and will be recognized as income (expense) when the related claims are paid or actuarial estimates are adjusted. At March 31, 2012 and December 31, 2011, the remaining deferred revenue was $0.9 million and $1.1 million, respectively. For the three months ended March 31, 2012 and 2011, we recognized $0.2 million and $0.1 million, respectively, of this deferral as income, which was included in other income, net.

 

18


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

Distributions Payable

In December 2011, our consolidated joint venture, Vistancia, LLC, sold its remaining interest in an unconsolidated joint venture. As a result of the sale, no other assets of Vistancia, LLC economically benefit the non-controlling interest of Vistancia, LLC and the Company recorded the remaining $3.3 million distribution payable to the non-controlling interest, which is paid $0.1 million each quarter. At March 31, 2012, the remaining distribution payable was $3.2 million.

13. Related Party Transactions

Related Party Receivables and Payables

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

 

     March 31,
2012
    December 31,
2011
 
     (In thousands)  

Note receivable from JFSCI

   $ 25,635      $ 25,381   

Notes receivable from unconsolidated joint ventures

     366        25,631   

Notes receivable from other related parties

     20,749        21,013   

Reserves for notes receivable from other related parties

     (12,715     (12,697

Receivables from related parties

     1,302        895   
  

 

 

   

 

 

 

Total receivables from related parties, net

   $ 35,337      $ 60,223   
  

 

 

   

 

 

 

Until August 2011, we participated in a centralized cash management function operated by JFSCI, whereby net cash flows from operations were transferred daily with JFSCI and resulted in related party transactions and monetary transfers to settle amounts owed. The resultant notes receivable and payable were unsecured, due on demand, and accrued interest monthly based on Prime less 2.05%. In August 2011, we ceased participation in this function and performed it independently. In May 2011, concurrent with issuance of the Secured Notes, through a $75.0 million cash payment and $41.5 million contribution of assets, the receivable from JFSCI was paid down by JFSCI and converted to a $38.9 million unsecured term note receivable from JFSCI, bearing 4% interest, payable in equal quarterly installments and maturing May 15, 2019. In June 2011 and August 2011, JFSCI elected to make prepayments, including accrued interest, totaling $14.3 million and applied these prepayments to future installments such that JFSCI would not be required to make a payment until February 2014. At March 31, 2012 and December 31, 2011, the note receivable from JFSCI, including accrued interest, was $25.6 million and $25.4 million, respectively. Quarterly, we evaluate collectability of the note receivable from JFSCI, which includes consideration of JFSCI’s payment history, operating performance and future payment requirements under the note. Based on these criteria, and as JFSCI applied prepayments under the note to defer future installments until February 2014, we do not presently anticipate collection risks on the note receivable from JFSCI.

Notes receivable from unconsolidated joint ventures, including accrued interest, at March 31, 2012 and December 31, 2011 were $0.4 million and $25.6 million, respectively. At December 31, 2011, included in the $25.6 million of notes receivable were $25.2 million of notes receivable held by our consolidated joint venture, SCLLC. In March 2012, our interest in SCLLC was redeemed by SCLLC and therefore, effective March 31, 2012, SCLLC’s notes receivable from unconsolidated joint ventures were excluded from these consolidated financial statements. At March 31, 2012, the remaining note receivable from an unconsolidated joint venture bears interest at 8% and matures in 2020. Further, this note earns additional interest to achieve a 17.5% internal rate of return, subject to available cash flows of the joint venture, and can be repaid prior to 2020. Quarterly, we evaluate collectability of this note, which includes consideration of prior payment history, operating performance and future payment requirements under the applicable note. Based on these criteria, we do not presently anticipate collection risks on this note.

Notes receivable from other related parties, including accrued interest, at March 31, 2012 and December 31, 2011 were $8.0 million and $8.3 million, respectively, net of related reserves of $12.7 million and $12.7 million, respectively. These notes are unsecured and mature from November 2012 through April 2021. At March 31, 2012 and December 31, 2011, these notes bore interest

 

19


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

ranging from Prime less .75% (2.5%) to 4.2%. Quarterly, we evaluate collectability of these notes. Our evaluation includes consideration of prior payment history, operating performance and future payment requirements under the applicable notes. At December 31, 2009, based on these criteria, notes receivable from Shea Management LLC and Shea Properties Management Company, Inc. (“SPMCI”) were deemed uncollectible and fully reserved. In June 2011, SPMCI paid the accrued interest for 2010 and forward. Therefore, unpaid interest in 2012 from SPMCI is not reserved; accrued interest prior to 2010 and the principal balance remain reserved. In addition, based on these criteria, we do not presently anticipate collection risks on the other notes.

The Company, entities under common control and these unconsolidated joint ventures also engage in transactions on behalf of the other, such as payment of invoices and payroll. The amounts resulting from these transactions are recorded in receivables from related parties or payables to related parties, non-interest bearing and due on demand. At March 31, 2012 and December 31, 2011, these receivables were $1.3 million and $0.9 million, respectively, and these payables were $3.3 million and $2.3 million, respectively.

Real Property and Joint Venture Transactions

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

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

At March 31, 2012 and 2011, we were the managing member for seven and ten, respectively, unconsolidated joint ventures and received a management fee from these joint ventures as reimbursement for direct and overhead costs incurred on behalf of the joint ventures. Fees from joint ventures representing reimbursement of our costs are recorded as a reduction to general and administrative expense. Fees from joint ventures representing profit are recorded as revenues. For the three months ended March 31, 2012, $1.0 million of management fees were offset against general and administrative expenses, and $0.1 million of management fees were included in revenues. For the three months ended March 31, 2011, $0.9 million of management fees were offset against general and administrative expenses, and $0.3 million management fees were included in revenues.

General and Administrative Related Party Transactions

JFSCI provides corporate services to us, including management, legal, tax, information technology, risk management, facilities, accounting, treasury and human resources. For the three months ended March 31, 2012 and 2011, general and administrative expenses included $4.0 million and $4.0 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 months ended March 31, 2012 and 2011, related-party rental expense was $0.2 million and $0.2 million, respectively.

14. Income Taxes

For the three months ended March 31, 2012, income tax benefit was $0.8 million, primarily from the decrease in the deferred tax asset valuation allowance. At March 31, 2012, the net deferred tax asset was $36.7 million, which primarily related to available loss carryforwards, impairments of inventory and available-for-sale investments, housing inventory and land basis differences, and timing of income recognition. The $36.7 million deferred tax asset valuation allowance fully reserves the net deferred tax asset due to inherent uncertainty of future income. To the extent eligible taxable income exists, which allows tax benefits of these deferred tax assets to be utilized, the effective tax rate may be reduced, subject to certain limitations under Internal Revenue Code Section 382 (“Section 382”), by reducing the valuation allowance and offsetting a portion of taxable income.

 

20


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

In 2009, we filed a petition with the United States Tax Court (the “Tax Court”) regarding our position on the completed contract method for homebuilding activities by SHLP, SHI and subsidiaries. During 2010 and 2011, we engaged in formal and informal discovery with the IRS. We expect the Tax Court will schedule a trial for July 2012. We expect our position will prevail. Accordingly, no liability for related taxes or interest has been recorded for SHI and its subsidiaries. Furthermore, as a limited partnership, any income taxes, interest or penalties imposed on SHLP are the responsibility of the Partners and are not reflected in the tax provision in these consolidated financial statements. However, if the Tax Court rules in favor of the IRS, SHI could be obligated to pay the IRS and applicable state taxing authorities up to $60 million and, under the Tax Distribution Agreement, SHLP could be obligated to make a distribution to the Partners up to $103 million to fund their related payments to the IRS and the applicable state taxing authorities.

15. Owners’ Equity

Owners’ equity consists of partners’ preferred and common capital. Common capital is comprised of limited partners with a collective 78.38% ownership and general partner with a 20.62% ownership. Preferred capital is comprised of limited partners with either series B (“Series B”) or series D (“Series D”) classification. Series B holders have no ownership interest but earn a preferred return at Prime less 2.05% (1.2% at March 31, 2012 and December 31, 2011) per annum on unreturned capital balances. At March 31, 2012 and December 31, 2011, accumulated undistributed preferred returns for Series B holders were $19.4 million and $18.9 million, respectively. Series D holders have a 1% ownership interest and earn a preferred return at 7% per annum on unreturned preferred capital balances. At March 31, 2012 and December 31, 2011, accumulated undistributed preferred returns for Series D holders were $43.3 million and $40.3 million, respectively.

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

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

16. Contingencies and Commitments

Lawsuits, claims and proceedings have been or may be instituted or asserted against us in the normal course of business, including actions brought on behalf of various classes of claimants. We are also subject to local, state and federal laws and regulations related to land development activities, house construction standards, sales practices, employment practices and environmental protection. As a result, we are subject to periodic examinations or inquiry by agencies administering these laws and regulations.

We record a reserve for potential legal claims and regulatory matters when they are probable of occurring and a potential loss is reasonably estimable, and are based on specific facts and circumstances, and we revise these estimates when necessary. At March 31, 2012 and December 31, 2011, we had reserves of $7.0 million and $5.8 million, respectively, net of expected recoveries, relating to these claims and matters, and while their outcome cannot be predicted with certainty, we believe we have appropriately reserved for them. However, if the liability arising from their resolution exceeds their recorded reserves, we could incur additional charges that could be significant.

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 March 31, 2012, the range of reasonably possible losses in excess of amounts recorded was not material.

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

 

21


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

At March 31, 2012 and December 31, 2011, joint and several non-recourse (“bad boy”) guarantees were provided for two secured permanent financing loans of related parties in which we have no ownership interest. The bad boy guarantee may become a liability for us upon a voluntary bankruptcy filing by the related party borrower or occurrence of other “bad” acts, including fraud or a material misrepresentation by the related party borrower. At December 31, 2011, these loans had a $34.1 million outstanding principal balance. In February 2012, one loan matured and we were released as a guarantor. At March 31, 2012, the remaining loan had a $31.2 million outstanding principal balance and matures in September 2012. A liability was not recorded for this guarantee as the probability of payment on this guarantee is remote.

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

We are required to provide surety bonds that guarantee completion of certain infrastructure serving our homebuilding projects. At March 31, 2012, we had a $68.8 million exposure in connection with $169.7 million of surety bonds issued for our projects. At December 31, 2011, we had a $71.0 million exposure in connection with $178.4 million of surety bonds issued for our projects.

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

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

In December 2011, Vistancia, LLC, a consolidated joint venture, sold its remaining interest in an unconsolidated joint venture. As a condition of sale, the Company effectively remains an 8.33% guarantor on certain community facility district bond obligations to which the Company must meet a calculated tangible net worth; otherwise, the Company is required to fund collateral to the bond issuer. At March 31, 2012 and December 31, 2011, the Company exceeded the minimum tangible net worth requirement.

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

 

22


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

17. Supplemental Disclosure to Consolidated Statements of Cash Flows

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

 

     Three Months Ended
March 31,
 
     2012     2011  
     (In thousands)  

Supplemental disclosure of cash flow information

    

Income taxes (refunded) paid

   $ (2,445   $ 26   

Interest paid, net of amounts capitalized

   $ 14      $ 3,989   

Supplemental disclosure of non-cash activities

    

Unrealized gain on available-for-sale investments, net

   $ 1,443      $ 680   

Reclassification of Deficit Distributions from unconsolidated joint ventures to other liabilities

   $ (25   $ 31   

Purchase of land in exchange for note payable

   $ 319      $ 402   

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

   $ (41,600   $ 0   

Elimination of joint venture note payable and other liabilities

   $ (1,949   $ 0   

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

   $ (39,651   $ 0   

18. Segment Information

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

 

   

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

   

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

   

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

   

Mountain West, comprised of communities in Colorado and Washington;

   

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

   

Other, comprised primarily of communities in Florida.

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

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

The reportable segments follow the same accounting policies as our consolidated financial statements described in Note 2. Operational results of each reportable segment are not necessarily indicative of the results that would have been achieved had the reportable segment been an independent, stand-alone entity during the periods presented. As a result of certain reporting changes that became effective December 31, 2011, we reclassified certain 2011 amounts to conform to the current reportable segments of the Company.

 

23


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

Financial information relating to reportable segments was as follows:

 

     March 31,
2012
     December 31,
2011
 
     (In thousands)  

Total assets:

     

Southern California

   $ 184,294       $ 176,999   

San Diego

     121,314         127,438   

Northern California

     216,664         219,734   

Mountain West

     301,987         351,050   

South West

     109,408         105,621   

Other

     5,518         4,313   
  

 

 

    

 

 

 

Total homebuilding assets

     939,185         985,155   

Corporate

     353,515         342,961   
  

 

 

    

 

 

 

Total assets

   $ 1,292,700       $ 1,328,116   
  

 

 

    

 

 

 

 

     March 31,
2012
     December 31,
2011
 
     (In thousands)  

Inventory:

     

Southern California

   $ 145,072       $ 142,877   

San Diego

     103,558         105,595   

Northern California

     201,035         204,901   

Mountain West

     243,075         256,685   

South West

     74,477         71,289   

Other

     3,517         2,463   
  

 

 

    

 

 

 

Total homebuilding inventory

     770,734         783,810   

Corporate

     0         0   
  

 

 

    

 

 

 

Total inventory

   $ 770,734       $ 783,810   
  

 

 

    

 

 

 

 

     Three Months Ended March 31,  
     2012      2011  
     (In thousands)  

Revenues:

     

Southern California

   $ 26,379       $ 19,773   

San Diego

     14,107         5,761   

Northern California

     25,960         15,855   

Mountain West

     18,594         13,154   

South West

     19,515         18,168   

Other

     805         1,091   
  

 

 

    

 

 

 

Total homebuilding revenues

     105,360         73,802   

Corporate

     243         257   
  

 

 

    

 

 

 

Total revenues

   $ 105,603       $ 74,059   
  

 

 

    

 

 

 

 

24


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

     Three Months Ended March 31,  
     2012     2011  
     (In thousands)  

(Loss) income before income taxes:

    

Southern California

   $ 1,974      $ (2,325

San Diego

     1        (1,299

Northern California

     817        (1,729

Mountain West

     (3,367     (1,780

South West

     (1,657     (2,034

Other

     (249     (254
  

 

 

   

 

 

 

Total homebuilding loss before income taxes

     (2,481     (9,421

Corporate

     1,531        880   
  

 

 

   

 

 

 

Total loss before income taxes

   $ (950   $ (8,541
  

 

 

   

 

 

 

19. Supplemental Guarantor Information

On May 10, 2011, SHLP and Shea Homes Funding Corp., a wholly-owned subsidiary of SHLP (collectively “SHLP Corp”), issued 8.625% senior secured notes in the aggregate principal amount of $750.0 million (the “Secured Notes”) and the outstanding obligations of the Secured Facilities were paid. Certain of SHLP’s wholly-owned direct and indirect subsidiaries guarantee the Secured Notes. Vistancia Marketing, LLC and Vistancia Construction, LLC, two of our limited liability company subsidiaries that guarantee the notes, are currently organized as single member limited liability companies under Vistancia, LLC, a non-guarantor subsidiary that is 83.3% owned by Shea Homes Southwest, Inc. However, pursuant to the terms of the Vistancia, LLC limited liability company agreement, Shea Homes Southwest, Inc. owns 100% of the economic and voting interests in Vistancia Marketing, LLC and Vistancia Construction, LLC.

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

 

25


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

Condensed Consolidating Balance Sheet

March 31, 2012

 

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

Assets

            

Cash and cash equivalents

   $ 167,638       $ 97,046      $ 13,654       $ 0      $ 278,338   

Restricted cash

     11,889         1,549        448         0        13,886   

Investments

     0         34,374        0         0        34,374   

Accounts and other receivables, net

     85,986         25,741        30,995         (30,455     112,267   

Receivables from related parties, net

     9,269         26,046        22         0        35,337   

Inventory

     598,206         172,265        1,410         (1,147     770,734   

Investments in joint ventures

     4,022         1,269        12,267         0        17,558   

Investments in subsidiaries

     667,337         84,309        97,256         (848,902     0   

Property and equipment, net

     376         1,629        0         0        2,005   

Other assets, net

     18,747         9,417        37         0        28,201   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,563,470       $ 453,645      $ 156,089       $ (880,504   $ 1,292,700   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities and equity

            

Liabilities:

            

Notes payable

   $ 751,374       $ 0      $ 0       $ 0      $ 751,374   

Payables to related parties

     20         0        0         3,312        3,332   

Accounts payable

     24,539         11,178        329         (41     36,005   

Other liabilities

     152,811         40,201        50,512         (32,366     211,158   

Intercompany

     344,371         (364,155     22,291         (2,507     0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     1,273,115         (312,776     73,132         (31,602     1,001,869   

Equity:

            

SHLP equity:

            

Owners’ equity

     282,520         758,586        82,481         (841,067     282,520   

Accumulated other comprehensive income

     7,835         7,835        0         (7,835     7,835   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total SHLP equity

     290,355         766,421        82,481         (848,902     290,355   

Non-controlling interests

     0         0        476         0        476   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity

     290,355         766,421        82,957         (848,902     290,831   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 1,563,470       $ 453,645      $ 156,089       $ (880,504   $ 1,292,700   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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

 

26


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

Condensed Consolidating Balance Sheet

December 31, 2011

 

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

Assets

            

Cash and cash equivalents

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

Restricted cash

     11,747         1,538        433         0        13,718   

Investments

     0         32,428        0         0        32,428   

Accounts and other receivables, net

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

Receivables from related parties, net

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

Inventory

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

Investments in joint ventures

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

Investments in subsidiaries

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

Property and equipment, net

     380         1,612        0         0        1,992   

Other assets, net

     18,851         10,057        112         0        29,020   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities and equity

            

Liabilities:

            

Notes payable

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

Payables to related parties

     0         0        1         2,342        2,343   

Accounts payable

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

Other liabilities

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

Intercompany

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

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

Equity:

            

SHLP equity:

            

Owners’ equity

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

Accumulated other comprehensive income

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total SHLP equity

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

Non-controlling interests

     0         0        27,100         0        27,100   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and equity

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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

 

27


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

Three Months Ended March 31, 2012

 

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

Revenues

   $ 67,786      $ 36,327      $ 1,490      $ 0      $ 105,603   

Cost of sales

     (54,206     (30,707     (186     64        (85,035
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     13,580        5,620        1,304        64        20,568   

Selling expenses

     (5,379     (2,992     (981     0        (9,352

General and administrative expenses

     (5,604     (2,051     (596     0        (8,251

Equity in income (loss) from joint ventures, net

     129        (24     (38     0        67   

Equity in income (loss) from subsidiaries

     3,751        (853     (1,277     (1,621     0   

Interest expense

     (5,958     (326     (4     0        (6,288

Other income (expense), net

     (926     1,845        1,451        (64     2,306   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (407     1,219        (141     (1,621     (950

Income tax benefit (expense)

     (4     752        4        0        752   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (411     1,971        (137     (1,621     (198

Less: Net income attributable to non-controlling interests

     0        0        (213     0        (213
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to SHLP

   $ (411   $ 1,971      $ (350   $ (1,621   $ (411
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 1,032      $ 3,414      $ (137   $ (3,064   $ 1,245   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

Three Months Ended March 31, 2011

 

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

Revenues

   $ 60,787      $ 10,709      $ 2,563      $ 0      $ 74,059   

Cost of sales

     (52,522     (9,251     (1,721     48        (63,446
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     8,265        1,458        842        48        10,613   

Selling expenses

     (5,339     (1,595     (1,284     0        (8,218

General and administrative expenses

     (6,195     (1,487     (541     0        (8,223

Equity in loss from joint ventures

     (202     (7     (184     0        (393

Equity in loss from subsidiaries

     (229     (732     (707     1,668        0   

Interest expense

     (3,739     (212     0        0        (3,951

Other income (expense), net

     (847     1,678        848        (48     1,631   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (8,286     (897     (1,026     1,668        (8,541

Income tax benefit (expense)

     (3     354        (10     0        341   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (8,289     (543     (1,036     1,668        (8,200

Less: Net income attributable to non-controlling interests

     0        0        (89     0        (89
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to SHLP

   $ (8,289   $ (543   $ (1,125   $ 1,668      $ (8,289
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ (7,609   $ 137      $ (1,036   $ 988      $ (7,520
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(b) Shea Homes Funding Corp. was formed on April 26, 2011, therefore no amounts are included in any financial statement before this date.

 

28


Table of Contents

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Condensed Consolidated Financial Statements (continued)

March 31, 2012

 

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2012

 

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

Operating activities

          

Net cash provided by (used in) operating activities

   $ (13,830   $ 268      $ 22,583      $ 739      $ 9,760   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities

          

Net (increase) decrease in promissory notes from related parties

     282        (247     (143     0        (108

Other investing activities

     (146     122        (289     0        (313
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     136        (125     (432     0        (421
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

          

Principal payments to financial institutions and others

     (402     0        (199     0        (601

Intercompany

     24,223        803        (24,287     (739     0   

Other financing activities

     0        0        1,234        0        1,234   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     23,821        803        (23,252     (739     633   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     10,127        946        (1,101     0        9,972   

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

   $ 167,638      $ 97,046      $ 13,654      $ 0      $ 278,338   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2011

 

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

Operating activities

          

Net cash (used in) provided by operating activities

   $ (17,983   $ (14,256   $ 458      $ (6,389   $ (38,170
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities

          

Net decrease (increase) in promissory notes from related parties

     (1,008     (56     (215     12,606        11,327   

Other investing activities

     (343     750        (799     0        (392
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (1,351     694        (1,014     12,606        10,935   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

          

Principal payments to financial institutions and others

     (20,439     0        0        0        (20,439

Intercompany

     (29,799     35,745        271        (6,217     0   

Other financing activities

     4,317        0        (90     0        4,227   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (45,921     35,745        181        (6,217     (16,212
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (65,255     22,183        (375     0        (43,447

Cash and cash equivalents at beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 34,256      $ 76,576      $ 12,595      $ 0      $ 123,427   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(b) Shea Homes Funding Corp. was formed on April 26, 2011, therefore no amounts are included in any financial statement before this date.

 

29


Table of Contents

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

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

RESULTS OF OPERATIONS

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

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

 

   

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

   

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

   

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

   

Mountain West, comprised of communities in Colorado and Washington;

   

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

   

Other, comprised primarily of communities in Florida.

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

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

Overview

The operating results experienced in the second half of 2011 continued to improve in the first quarter of 2012, most notably, as compared to the first quarter of 2011, a 44% increase in new home sales orders, a 56% increase in new home orders per community, a 31% increase in homes closed and a 43% increase in homebuilding revenues. Gross margin as a percentage of revenues also improved 36%, from 14.3% to 19.5%. Furthermore, we believe we are positioned to take advantage of the housing market recovery. We have $312.7 million in cash and investments and continue to invest in land opportunities in desirable locations to supplement our favorable land positions. In 2012, for the second year in a row, Shea Homes was honored as one of 50 top consumer brands to be named a “Customer Service Champion” by J.D. Power Associates, which should further differentiate our brand while lowering selling costs from increased referrals.

For the three months ended March 31, 2012, net loss attributable to SHLP was $(0.4) million compared to $(8.3) million for the three months ended March 31, 2011. This decrease was primarily attributable to $10.0 million of higher gross margin due to increased homes closed (238 homes closed in 2012 compared to 182 homes closed in 2011), offset by $1.1 million of increased selling expenses, primarily due to increased homes closed, and $2.3 million of increased interest expense, primarily due to decreased assets qualifying for interest capitalization.

 

30


Table of Contents
     Three Months Ended March 31,  
     2012     2011     % Change  
     (Dollars in thousands)  

Revenues

   $ 105,603      $ 74,059        43

Cost of sales

     (85,035     (63,446     34   
  

 

 

   

 

 

   

 

 

 

Gross margin

     20,568        10,613        94   

Selling expenses

     (9,352     (8,218     14   

General and administrative expenses

     (8,251     (8,223     0   

Equity in income (loss) from joint ventures

     67        (393     117   

Interest expense

     (6,288     (3,951     59   

Other income, net

     2,306        1,631        41   
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (950     (8,541     (89

Income tax benefit

     752        341        121   
  

 

 

   

 

 

   

 

 

 

Net loss

     (198     (8,200     (98

Less: Net income attributable to non-controlling interests

     (213     (89     139   
  

 

 

   

 

 

   

 

 

 

Net loss attributable to SHLP

   $ (411   $ (8,289     (95 )% 
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 1,245      $ (7,520     117
  

 

 

   

 

 

   

 

 

 

Revenues

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

 

     Three Months Ended March 31,  
     2012      2011      %
Change
 
     (Dollars in thousands)  

Revenues:

        

House revenues

   $ 100,905       $ 71,168         42

Land revenues

     3,963         1,873         112   

Other homebuilding revenues

     492         761         (35
  

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

     105,360         73,802         43   

Other revenues

     243         257         (5
  

 

 

    

 

 

    

 

 

 

Total revenues

   $ 105,603       $ 74,059         43
  

 

 

    

 

 

    

 

 

 

For the three months ended March 31, 2012, total revenues were $105.6 million compared to $74.1 million for the three months ended March 31, 2011. This increase was primarily attributable to a 31% increase in homes closed and an 8% increase in the average selling price (“ASP”) of homes closed.

 

31


Table of Contents

For the three months ended March 31, 2012 and 2011, homebuilding revenues by segment were as follows:

 

     Three Months Ended March 31,  
     2012      2011      %
Change
 
     (Dollars in thousands)  

Southern California:

        

House revenues

   $ 23,318       $ 19,773         18

Land revenues

     3,057         0         100   

Other homebuilding revenues

     4         0         100   
  

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

   $ 26,379       $ 19,773         33
  

 

 

    

 

 

    

 

 

 

San Diego:

        

House revenues

   $ 14,104       $ 5,707         147

Land revenues

     0         50         (100

Other homebuilding revenues

     3         4         (25
  

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

   $ 14,107       $ 5,761         145
  

 

 

    

 

 

    

 

 

 

Northern California:

        

House revenues

   $ 25,824       $ 15,819         63

Land revenues

     0         0         0   

Other homebuilding revenues

     136         36         278   
  

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

   $ 25,960       $ 15,855         64
  

 

 

    

 

 

    

 

 

 

Mountain West:

        

House revenues

   $ 17,552       $ 10,815         62

Land revenues

     906         1,823         (50

Other homebuilding revenues

     136         516         (74
  

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

   $ 18,594       $ 13,154         41
  

 

 

    

 

 

    

 

 

 

South West:

        

House revenues

   $ 19,302       $ 17,963         7

Land revenues

     0         0         0   

Other homebuilding revenues

     213         205         4   
  

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

   $ 19,515       $ 18,168         7
  

 

 

    

 

 

    

 

 

 

Other:

        

House revenues

   $ 805       $ 1,091         (26 )% 

Land revenues

     0         0         0   

Other homebuilding revenues

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total homebuilding revenues

   $ 805       $ 1,091         (26 )% 
  

 

 

    

 

 

    

 

 

 

For the three months ended March 31, 2012, total homebuilding revenues were $105.4 million compared to $73.8 million for the three months ended March 31, 2011. This increase was primarily attributable to a 31% increase in homes closed and an 8% increase in the ASP of homes closed. The increase in the ASP of homes closed was primarily attributable to product mix weighted toward higher-priced homes.

In the Southern California segment, homes closed increased 21% and the ASP of homes closed decreased 2%. The increase of homes closed was primarily due to closings from the Vantis project that was contributed to SHLP in May 2011, and a new community that opened in 2011. In the San Diego segment, homes closed and the ASP of homes closed increased 145% and 1%,

 

32


Table of Contents

respectively, primarily from existing communities. In the Northern California segment, homes closed increased 68% and the ASP of homes closed decreased 3%. The increase of homes closed is primarily due to closings from the Montage project, which was contributed to SHLP in May 2011. In the Mountain West segment, homes closed and the ASP of homes closed increased 41% and 15%, respectively, primarily from existing communities. In the South West segment, homes closed decreased 3% and the ASP of homes closed increased 11%.

For the three months ended March 31, 2012 and 2011, homes closed by segment were as follows:

 

     Three Months Ended March 31,  
     2012      2011      %
Change
 

Homes closed:

        

Southern California

     47         39         21

San Diego

     27         11         145   

Northern California

     57         34         68   

Mountain West

     38         27         41   

South West

     65         67         (3

Other

     4         4         0   
  

 

 

    

 

 

    

 

 

 

Total consolidated

     238         182         31   

Unconsolidated joint ventures

     20         20         0   
  

 

 

    

 

 

    

 

 

 

Total homes closed

     258         202         28
  

 

 

    

 

 

    

 

 

 

For the three months ended March 31, 2012 and 2011, the ASP of homes closed by segment was as follows:

 

     Three Months Ended March 31,  
     2012      2011      %
Change
 

ASP of homes closed:

        

Southern California

   $ 496,128       $ 507,000         (2 )% 

San Diego

     522,370         518,818         1   

Northern California

     453,053         465,265         (3

Mountain West

     461,895         400,556         15   

South West

     296,954         268,104         11   

Other

     201,250         272,750         (26
  

 

 

    

 

 

    

 

 

 

Total consolidated

     423,971         391,033         8   

Unconsolidated joint ventures

     309,800         338,250         (8
  

 

 

    

 

 

    

 

 

 

Total ASP of homes closed

   $ 415,120       $ 385,807         8
  

 

 

    

 

 

    

 

 

 

Gross Margin

Gross margin is revenues less cost of sales and is comprised of gross margins from our homebuilding and corporate segments. Gross margin for the three months ended March 31, 2012 and 2011 was as follows:

 

     Three Months Ended March 31,  
     2012      Gross
Margin %
    2011      Gross
Margin %
 
     (Dollars in thousands)  

Gross margin

   $ 20,568         19.5   $ 10,613         14.3
  

 

 

    

 

 

   

 

 

    

 

 

 

 

33


Table of Contents

For the three months ended March 31, 2012, total gross margin was $20.6 million compared to $10.6 million for the three months ended March 31, 2011. This increase was primarily attributable to increased homes closed and higher margins resulting from increased ASP of homes closed.

Gross margin by segment for the three months ended March 31, 2012 and 2011 was as follows:

 

     Three Months Ended March 31,  
     2012      Gross
Margin %
    2011      Gross
Margin %
 
     (Dollars in thousands)  

Gross margin:

          

Southern California

   $ 6,133         23.2   $ 1,368         6.9

San Diego

     3,318         23.5        911         15.8   

Northern California

     6,515         25.1        3,383         21.3   

Mountain West

     1,475         7.9        2,559         19.5   

South West

     2,768         14.2        1,958         10.8   

Other

     116         14.4        177         16.2   

Corporate

     243         0        257         0   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total gross margin

   $ 20,568         19.5   $ 10,613         14.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Impairment is primarily attributable to lower home prices driven by increased incentives and price reductions in response to weak demand and economic conditions, including foreclosures, higher unemployment, lower consumer confidence and tighter mortgage credit standards. The decrease in impairment from March 31, 2011 was the result of price stabilization in the housing market. Impairment by segment and type for the three months ended March 31, 2012 and 2011 was as follows:

 

XXXXXX XXXXXX XXXXXX
    Three Months Ended March 31,  
    2012     2011     %
Change
 
    (Dollars in thousands)  

Impairment by segment:

     

Southern California

  $ 0      $ 0        0

San Diego

    0        0        0   

Northern California

    0        0        0   

Mountain West

    0        0        0   

South West

    0        618        (100

Other

    0        0        0   
 

 

 

   

 

 

   

 

 

 

Total impairment

  $ 0      $ 618        (100 )% 
 

 

 

   

 

 

   

 

 

 

Impairment by type:

     

Inventory

  $ 0      $ 618        (100 )% 

Joint venture

    0        0        0   
 

 

 

   

 

 

   

 

 

 

Total impairment

  $ 0      $ 618        (100 )% 
 

 

 

   

 

 

   

 

 

 

 

34


Table of Contents

Selling, General and Administrative Expense

Selling, general and administrative expense for the three months ended March 31, 2012 and 2011 was as follows:

 

     Three Months Ended March 31,  
     2012     2011     %
Change
 
     (Dollars in thousands)  

Total homebuilding revenues

   $ 105,360      $ 73,802        43

Selling expense

   $ 9,352      $ 8,218        14
  

 

 

   

 

 

   

 

 

 

% of total homebuilding revenues

     8.9     11.1     (20 )% 
  

 

 

   

 

 

   

 

 

 

General and administrative expense

   $ 8,251      $ 8,223        0
  

 

 

   

 

 

   

 

 

 

% of total homebuilding revenues

     7.8     11.2     (30 )% 
  

 

 

   

 

 

   

 

 

 

Total selling, general and administrative expense

   $ 17,603      $ 16,441        7
  

 

 

   

 

 

   

 

 

 

% of total homebuilding revenues

     16.7     22.3     (25 )% 
  

 

 

   

 

 

   

 

 

 

Selling Expense

For the three months ended March 31, 2012, selling expense was $9.4 million compared to $8.2 million for the three months ended March 31, 2011. This increase was primarily attributable to a 43% increase in homebuilding revenues and a corresponding increase in direct selling costs and model home amortization costs.

General and Administrative Expense

For the three months ended March 31, 2012, general and administrative expense was $8.3 million compared to $8.2 million for the three months ended March 31, 2011.

Equity in Income (Loss) from Joint Ventures

Equity in income (loss) from joint ventures represents our share of income (loss) from unconsolidated joint ventures accounted for under the equity method. These joint ventures are generally involved in real property development.

For the three months ended March 31, 2012, equity in income (loss) from joint ventures was $0.1 million compared to $(0.4) million for the three months ended March 31, 2011. For the three months ended March 31, 2012 and 2011, there were no significant earnings or losses from any unconsolidated joint venture.

Interest Expense

Interest expense is interest incurred and not capitalized. For the three months ended March 31, 2012 and 2011, most interest incurred was capitalized to inventory and some expensed.

For the three months ended March 31, 2012, interest expense was $6.3 million compared to $4.0 million for the three months ended March 31, 2011. This increase was primarily attributable to fewer assets qualifying for interest capitalization, offset by lower interest incurred. The decrease in interest incurred was the result of a higher effective interest rate on our previous notes payable, which was extinguished in May 2011 and replaced by new senior secured notes.

Other Income, Net

Other income, net is comprised of interest income, gains (losses) on investments and other income (expense). Interest income is primarily from related party notes receivable, investments and interest bearing cash accounts.

 

35


Table of Contents

For the three months ended March 31, 2012 and 2011, other income, net was as follows:

 

     Three Months Ended March 31,  
     2012      2011      %
Change
 
     (Dollars in thousands)  

Other income, net:

        

Interest income

   $ 1,319       $ 725         82

Loan modification fee recovery

     0         659         (100

Gain on investments

     23         139         (83

Other income

     964         108         792   
  

 

 

    

 

 

    

 

 

 

Total other income, net

   $ 2,306       $ 1,631         41
  

 

 

    

 

 

    

 

 

 

For the three months ended March 31, 2012, other income, net was $2.3 million compared to $1.6 million for the three months ended March 31 2011. This increase was primarily attributable to increased interest income from maintaining higher cash balances in interest bearing accounts and $0.8 million of income from the deferred gain amortization related to the novation and reinsurance of our completed operations reserves in 2009.

Income Tax Benefit

At March 31, 2012 and December 31, 2011, net deferred tax assets were $36.7 million and $38.2 million, respectively, which primarily related to available loss carryforwards, inventory and marketable securities impairments, housing and land inventory basis differences and income recognition timing differences from our investment in joint ventures. At March 31, 2012 and December 31, 2011, deferred tax asset valuation fully reserved the net deferred tax asset due to the inherent uncertainty of future income. To the extent eligible taxable income exists, which allows tax benefits of these deferred tax assets to be utilized, the effective tax rate may be reduced, subject to certain limitations under Internal Revenue Code Section 382, by reducing the valuation allowance and offsetting a portion of taxable income. However, it is unlikely all net deferred tax assets will be realized.

For the three months ended March 31, 2012, income tax benefit was $0.8 million compared to $0.4 million for the three months ended March 31, 2011. This increase was primarily attributable to decreased taxable income and the reduction of certain deferred tax assets previously reserved.

Net Income Attributable to Non-Controlling Interests

We consolidate joint ventures when we have a controlling interest or, absent a controlling interest, can substantially influence its business. Net income attributable to non-controlling interests represents the share of income attributable to the parties having a non-controlling interest.

For the three months ended March 31, 2012, net income attributable to non-controlling interests was $0.2 million compared to $0.1 million for the three months ended March 31, 2011. There were no significant activities for the three months ended March 31, 2012 and 2011.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income (loss) plus other comprehensive income (loss) attributable to unrealized gains (losses) from investments, net of reclassification adjustments for realized gains and tax expense.

 

36


Table of Contents

For the three months ended March 31, 2012 and 2011, comprehensive income (loss) was as follows:

 

     Three Months Ended March 31,  
     2012     2011     %
Change
 
     (Dollars in thousands)  

Comprehensive Income (Loss):

      

Net loss

   $ (198   $ (8,200     (98 )% 

Unrealized gains on investments, net

     1,443        680        112   
  

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss), net

   $ 1,245      $ (7,520     117
  

 

 

   

 

 

   

 

 

 

SELECTED HOMEBUILDING OPERATIONAL DATA

Homes Sales Orders and Active Selling Communities

Home sales orders are contracts executed with homebuyers to purchase homes and are stated net of cancellations. Except where market conditions or other factors justify increasing available unsold home inventory, construction of a home typically begins when a sales contract for that home is executed. Therefore, recognition of a home sales order usually represents the beginning of the home’s construction cycle. Accordingly, homebuilding construction expenditures and, ultimately, homebuilding revenues and cash flow, are dependent on the timing and magnitude of home sales orders.

Active selling community is a designation of a sales office that advertises, markets and sells homes for a new home community. Sales offices in communities near the end of their sales cycle are not designated as an active selling community. Active selling community is a designation similar to a store or sales outlet and is used to measure home sales order results on a per active selling community basis. Presentation of home sales orders per active selling community is a means of assessing sales growth or reductions across communities with a common analytical measurement. The average number of active selling communities for a particular period represents the aggregate number of active selling communities in operation at the end of each month in such period divided by the number of months in such period.

For the three months ended March 31, 2012 and 2011, home sales orders, net of cancellations, were as follows:

 

     Three Months Ended March 31,  
     2012      2011      %
Change
 

Home sales orders, net:

        

Southern California

     70         80         (13 )% 

San Diego

     53         40         33   

Northern California

     121         42         188   

Mountain West

     89         58         53   

South West

     154         120         28   

Other

     12         6         100   
  

 

 

    

 

 

    

 

 

 

Total consolidated

     499         346         44   

Unconsolidated joint ventures

     43         39         10   
  

 

 

    

 

 

    

 

 

 

Total home sales orders, net

     542         385         41
  

 

 

    

 

 

    

 

 

 

 

37


Table of Contents

For the three months ended March 31, 2012 and 2011, active selling communities were as follows:

 

     Three Months Ended March 31,  
     2012      2011      %
Change
 

Average number of active selling communities:

        

Southern California

     10         12         (17 )% 

San Diego

     11         10         10   

Northern California

     15         12         25   

Mountain West

     13         13         0   

South West

     19         27         (30

Other

     3         3         0   
  

 

 

    

 

 

    

 

 

 

Total consolidated

     71         77         (8

Unconsolidated joint ventures

     12         13         (8
  

 

 

    

 

 

    

 

 

 

Total average number of active selling communities

     83         90         (8 )% 
  

 

 

    

 

 

    

 

 

 

For the three months ended March 31, 2012, consolidated home sales orders and average number of consolidated active selling communities were 499 and 71, respectively, compared to 346 and 77, respectively, for the three months ended March 31, 2011. For the three months ended March 31, 2012 and 2011, consolidated home sales order per active selling community were 7.0 and 4.5, respectively.

Sales Order Backlog and Cancellation Rates

Sales order backlog represents homes sold and under contract to be built, but not closed. Backlog sales value is the revenue anticipated to be realized at closing. A home is sold when a sales contract is signed by the seller and buyer and upon receipt of a prerequisite deposit. A home is closed when all conditions of escrow are met, including delivery of the home, title passage, and appropriate consideration is received and collection of associated receivables, if any, is reasonably assured. A sold home is classified “in backlog” during the time between its sale and close. During that time, construction costs are generally incurred to complete the home except where market conditions or other factors justify increasing available unsold home inventory. Backlog is therefore an important performance measurement in analysis of cash outflows and inflows. However, because sales order contracts can be cancelled by the buyer in certain circumstances, not all homes in backlog will result in closings.

At March 31, 2012 and 2011, sales order backlog was as follows:

 

     Homes      Sales Value      ASP  
     March 31,      March 31,      March 31,  
     2012      2011      2012      2011      2012      2011  
                   (In thousands)      (In thousands)  

Backlog:

                 

Southern California

     82         118       $ 38,831       $ 65,469       $ 474       $ 555   

San Diego

     65         71         27,037         36,697         416         517   

Northern California

     169