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EX-32.2 - EXHIBIT 32.2 - WILLIAM LYON HOMESwlh-6302018xex322.htm
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EX-31.2 - EXHIBIT 31.2 - WILLIAM LYON HOMESwlh-6302018xex312.htm
EX-31.1 - EXHIBIT 31.1 - WILLIAM LYON HOMESwlh-6302018xex311.htm


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________ 
FORM 10-Q
______________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-31625
______________________________________ 
WILLIAM LYON HOMES
(Exact name of registrant as specified in its charter)
______________________________________ 
Delaware
 
33-0864902
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
4695 MacArthur Court, 8th Floor
Newport Beach, California
 
92660
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (949) 833-3600
______________________________________ 
Indicate by check mark whether 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  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging Growth Company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class of Common Stock
Outstanding at August 1, 2018
Common stock, Class A, par value $0.01
33,159,509

Common stock, Class B, par value $0.01
4,817,394





WILLIAM LYON HOMES
INDEX
 
 
 
Page
No.
 
Item 1.
Financial Statements as of June 30, 2018, and for the three and six months ended June 30, 2018 and 2017 (Unaudited)
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.





CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

Investors are cautioned that certain statements contained in this Quarterly Report on Form 10-Q, as well as some statements by the Company in periodic press releases and information included in oral statements or other written statements by the Company are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21 of the Securities Exchange Act of 1934, as amended. Statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, “hopes”, and similar expressions constitute forward-looking statements. Such statements may include, but are not limited to, information related to: anticipated operating results; home deliveries and backlog conversion; financial resources and condition; cash needs and liquidity; timing of project openings; leverage ratios and compliance with debt covenants; revenues and average selling prices of deliveries; sales price ranges for active and future communities; backlog conversion; global and domestic economic conditions; market and industry trends; cycle times; profitability and gross margins; cost of revenues; selling, general and administrative expenses and leverage; interest expense; inventory write-downs; unrecognized tax benefits; land acquisition spending and timing; financial services and ancillary business performance and strategies; the anticipated benefits to be realized from the RSI acquisition; debt maturities; business and operational strategies and the anticipated effects thereof; the Company's ability to achieve tax benefits and utilize its tax attributes; sales pace; effects of home buyer cancellations; community count; joint ventures; the Company's ability to acquire land and pursue real estate opportunities; the Company's ability to gain approvals and open new communities; the Company's ability to sell homes and properties; the Company's ability to secure materials and subcontractors; the Company's ability to produce the liquidity and capital necessary to expand and take advantage of opportunities; and legal proceedings, insurance and claims. Forward-looking statements are based upon expectations and projections about future events and are subject to assumptions, risks and uncertainties about, among other things, the Company, economic and market factors and the homebuilding industry. There is no guarantee that any of the events anticipated by the forward-looking statements in this quarterly report on Form 10-Q will occur, or if any of the events occur, there is no guarantee what effect it will have on the Company's operations, financial condition or share price. The Company's past performance, and past or present economic conditions in its housing markets, are not indicative of future performance or conditions. Investors are urged not to place undue reliance on forward-looking statements. The Company will not, and undertakes no obligation to, update or revise forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to projections over time unless required by federal securities laws.

Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements due to a number of factors. While it is impossible to identify all such factors, the major risks and uncertainties, and assumptions that are made, that affect the Company's business and may cause actual results to differ materially from those estimated by the Company include, but are not limited to: the Company’s ability to successfully integrate RSI Communities’ homebuilding operations with its existing operations; any adverse effect on the Company’s, or RSI Communities’, business operations following the acquisition; the availability of skilled subcontractors, labor and homebuilding materials and increased construction cycle times; the availability and timing of mortgage financing; adverse weather conditions; the Company’s financial leverage and level of indebtedness and any inability to comply with financial and other covenants under its debt instruments; continued volatility and worsening in general economic conditions either internationally, nationally or in regions in which the Company operates; increased costs as a result of government-imposed tariffs; increased supply in our markets; affordability pressures; changes in governmental laws and regulations and increased costs, fees and delays associated therewith; government actions, policies, programs and regulations directed at or affecting the housing market (including the Tax Cuts and Jobs Act (the “Tax Cuts and Job Act”), the Dodd-Frank Act, tax benefits associated with purchasing and owning a home, and the standards, fees and size limits applicable to the purchase or insuring of mortgage loans by government-sponsored enterprises and government agencies), the homebuilding industry, or construction activities; defects in manufactured products or other homebuilding materials; changes in existing tax laws or enacted corporate income tax rates, including pursuant to the Tax Cuts and Job Act; worsening in markets for residential housing; the impact of construction defect, product liability and home warranty claims, including the adequacy of self-insurance accruals, and the applicability and sufficiency of the Company’s insurance coverage; decline in real estate values resulting in impairment of the Company’s real estate assets; volatility in the banking industry, credit and capital markets; the timing of receipt of regulatory approvals and the opening of projects; the availability and cost of land for future development; restraints on foreign investment; terrorism or other hostilities involving the United States; building moratorium or “slow-growth” or “no-growth” initiatives that could be implemented in states in which the Company operates; changes in mortgage and other interest rates; conditions in the capital, credit and financial markets, including mortgage lending standards and the availability of mortgage financing; changes in generally accepted accounting principles or interpretations of those principles; changes in prices of homebuilding materials; competition for home sales from other sellers of new and resale homes; cancellations and the Company’s ability to convert its backlog into deliveries; the occurrence of events such as landslides, soil subsidence and earthquakes that are uninsurable, not economically insurable or not subject to effective indemnification agreements; increased outside broker costs; changes in governmental laws and regulations; limitations on the Company’s ability to utilize its tax attributes; whether an ownership change occurred that could, under certain circumstances, have resulted in the limitation of the Company’s ability to offset prior years’ taxable income with net operating losses; and other factors, risks and uncertainties. These and other risks and uncertainties are more fully described in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as well as those factors or conditions described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

1



EXPLANATORY NOTE

In this interim report on Form 10-Q, unless otherwise stated or the context otherwise requires, the “Company,” “we,” “our,” and “us” refer to William Lyon Homes, a Delaware corporation, and its subsidiaries. In addition, unless otherwise stated or the context otherwise requires, “Parent” refers to William Lyon Homes, and “California Lyon” refers to William Lyon Homes, Inc., a California corporation and wholly-owned subsidiary of Parent.


2



PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements
WILLIAM LYON HOMES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except number of shares and par value per share)
 
June 30,
2018
 
December 31,
2017
 
(unaudited)
 

ASSETS
 
 
 
Cash and cash equivalents — Note 1
$
49,171

 
$
182,710

Receivables
14,237

 
10,223

Escrow proceeds receivable
3,797

 
3,319

Real estate inventories — Note 6
 
 
 
Owned
2,331,568

 
1,699,850

Not owned
247,049

 

Investment in unconsolidated joint ventures — Note 4
5,695

 
7,867

Goodwill
118,877

 
66,902

Intangibles, net of accumulated amortization of $4,640 as of June 30, 2018 and December 31, 2017
6,700

 
6,700

Deferred income taxes
46,445

 
47,915

Lease right-of-use assets
16,818

 
14,454

Other assets, net
37,890

 
21,164

Total assets
$
2,878,247

 
$
2,061,104

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
89,049

 
$
58,799

Accrued expenses
122,410

 
111,491

Liabilities from inventories not owned — Note 13
247,049

 

Notes payable — Note 7:
 
 
 
Revolving credit facility
145,000

 

Seller financing

 
589

Construction notes payable
1,510

 

Joint venture notes payable
161,562

 
93,926

3/4% Senior Notes due April 15, 2019 — Note 7

 
149,362

7% Senior Notes due August 15, 2022 — Note 7
347,107

 
346,740

6% Senior Notes due September 1, 2023 — Note 7
343,354

 

5 7/8% Senior Notes due January 31, 2025 — Note 7
440,251

 
439,567

 
1,897,292

 
1,200,474

Commitments and contingencies — Note 13


 


Equity:
 
 
 
William Lyon Homes stockholders’ equity
 
 
 
Preferred stock, par value $0.01 per share; 10,000,000 shares authorized and no shares issued and outstanding at June 30, 2018 and December 31, 2017

 

Common stock, Class A, par value $0.01 per share; 150,000,000 shares authorized; 34,407,540 and 34,267,510 shares issued, 33,159,509 and 33,135,650 shares outstanding at June 30, 2018 and December 31, 2017, respectively
344

 
344

Common stock, Class B, par value $0.01 per share; 30,000,000 shares authorized; 4,817,394 shares issued and outstanding at June 30, 2018 and December 31, 2017
48

 
48

Additional paid-in capital
448,656

 
454,286

Retained earnings
356,577

 
325,794

Total William Lyon Homes stockholders’ equity
805,625

 
780,472

Noncontrolling interests — Note 3
175,330

 
80,158

Total equity
980,955

 
860,630

Total liabilities and equity
$
2,878,247

 
$
2,061,104

See accompanying notes to condensed consolidated financial statements

3



WILLIAM LYON HOMES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except number of shares and per share data)
(unaudited)
 
 
 
 
Three 
 Months 
 Ended 
 June 30, 
 2018
 
Three 
 Months 
 Ended 
 June 30, 
 2017
 
Six 
 Months 
 Ended 
 June 30, 
 2018
 
Six 
 Months 
 Ended 
 June 30, 
 2017
Operating revenue
 
 
 
 
 
 
 
Home sales — Note 1
$
518,432

 
$
422,633

 
$
890,817

 
$
681,487

Construction services — Note 1
1,020

 
59

 
2,003

 
59


519,452

 
422,692

 
892,820

 
681,546

Operating costs
 
 
 
 
 
 
 
Cost of sales — homes
(425,572
)
 
(353,057
)
 
(732,880
)
 
(571,512
)
Construction services — Note 1
(959
)
 
(6
)
 
(1,942
)
 
(6
)
Sales and marketing
(28,848
)
 
(21,284
)
 
(51,541
)
 
(35,989
)
General and administrative
(28,507
)
 
(19,550
)
 
(53,028
)
 
(38,496
)
Transaction expenses
(777
)
 

 
(3,907
)
 

Other
(621
)
 
(560
)
 
(919
)
 
(1,000
)

(485,284
)
 
(394,457
)
 
(844,217
)
 
(647,003
)
Operating income
34,168

 
28,235

 
48,603

 
34,543

Equity in income of unconsolidated joint ventures
533

 
1,213

 
1,465

 
1,462

Other income, net
311

 
8

 
346

 
353

Income before extinguishment of debt
35,012

 
29,456

 
50,414

 
36,358

Loss on extinguishment of debt

 

 

 
(21,828
)
Income before provision for income taxes
35,012

 
29,456

 
50,414

 
14,530

Provision for income taxes — Note 10
(7,776
)
 
(9,205
)
 
(10,590
)
 
(3,575
)
Net income
27,236

 
20,251

 
39,824

 
10,955

Less: Net income attributable to noncontrolling interests
(4,781
)
 
(1,297
)
 
(9,041
)
 
(2,001
)
Net income available to common stockholders
$
22,455

 
$
18,954

 
$
30,783

 
$
8,954

Income per common share:
 
 
 
 
 
 
 
Basic
$
0.59

 
$
0.51

 
$
0.81

 
$
0.24

Diluted
$
0.57

 
$
0.49

 
$
0.77

 
$
0.23

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
38,017,211

 
37,051,967

 
37,974,471

 
36,980,540

Diluted
39,688,271

 
38,298,624

 
39,772,437

 
38,231,201

See accompanying notes to condensed consolidated financial statements


4



WILLIAM LYON HOMES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(in thousands)
(unaudited)
 
 
William Lyon Homes Stockholders
 
 
 
 
 
Common Stock
 
Additional
Paid-In
 
 
 
Non-
Controlling
 
 
 
Shares
 
Amount
 
Capital
 
Retained Earnings
 
Interests
 
Total
Balance - December 31, 2017
39,085

 
$
392

 
$
454,286

 
$
325,794

 
$
80,158

 
$
860,630

Net income

 

 

 
30,783

 
9,041

 
39,824

Cash contributions from members of consolidated entities

 

 

 

 
120,102

 
120,102

Cash distributions to members of consolidated entities

 

 

 

 
(33,971
)
 
(33,971
)
Repurchases of common stock
(253
)
 
(3
)
 
(6,118
)
 

 

 
(6,121
)
Shares remitted to Company to satisfy employee tax obligations
(186
)
 
(2
)
 
(4,694
)
 

 

 
(4,696
)
Stock based compensation expense
579

 
5

 
5,182

 

 

 
5,187

Balance - June 30, 2018
39,225


$
392

 
$
448,656


$
356,577


$
175,330

 
$
980,955

See accompanying notes to condensed consolidated financial statements
 


5



WILLIAM LYON HOMES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited) 
 
Six 
 Months 
 Ended 
 June 30, 
 2018
 
Six 
 Months 
 Ended 
 June 30, 
 2017
Operating activities
 
 
 
Net income
$
39,824

 
$
10,955

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

 
 
Depreciation and amortization
3,972

 
891

Net change in deferred income taxes
1,470

 
471

Stock based compensation expense
5,187

 
3,215

Equity in earnings of unconsolidated joint ventures
(1,465
)
 
(1,462
)
Distributions from unconsolidated joint ventures
3,815

 
702

Loss on extinguishment of debt

 
21,828

Net changes in operating assets and liabilities:

 
 
Receivables
(2,441
)
 
1,042

Escrow proceeds receivable
(478
)
 
46

Real estate inventories
(198,518
)
 
(92,306
)
Other assets
(1,693
)
 
(2,939
)
Accounts payable
20,935

 
4,510

Accrued expenses
(558
)
 
(13,765
)
Net cash used in operating activities
(129,950
)
 
(66,812
)
Investing activities

 
 
Cash paid for acquisitions, net of cash acquired
(475,221
)
 

Purchases of property and equipment
(6,183
)
 
(234
)
Net cash used in investing activities
(481,404
)

(234
)
Financing activities

 
 
Proceeds from borrowings on notes payable
120,739

 
49,478

Principal payments on notes payable
(53,898
)
 
(53,143
)
Redemption premium of 8.5% Senior Notes

 
(19,645
)
Principal payments of 8.5% Senior Notes

 
(425,000
)
Principal payments on 5.75% Senior Notes
(150,000
)
 

Proceeds from issuance of 5.875% Senior Notes

 
446,468

Proceeds from issuance of 6% Senior Notes
350,000

 

Proceeds from borrowings on Revolver
255,000

 
190,000

Payments on Revolver
(110,000
)
 
(154,000
)
Principal payments on subordinated amortizing notes

 
(3,737
)
Payment of deferred loan costs
(9,340
)
 
(9,666
)
Shares remitted to, or withheld by the Company for employee tax withholding
(4,696
)
 
(1,380
)
Payments to repurchase common stock
(6,121
)
 

Noncontrolling interest contributions
120,102

 
51,291

Noncontrolling interest distributions
(33,971
)
 
(13,659
)
Net cash provided by financing activities
477,815

 
57,007

Net decrease in cash and cash equivalents
(133,539
)
 
(10,039
)
Cash and cash equivalents — beginning of period
182,710

 
42,612

Cash and cash equivalents — end of period
$
49,171

 
$
32,573

Supplemental disclosures:

 
 
Cash paid during the period for income taxes
$
21,298

 
$
16,930

Supplemental disclosures of non-cash investing and financing activities:


 
 
Right-of-use assets obtained in exchange for new operating lease liabilities
$
5,387

 
$
5,058

Accrued deferred loan costs
$
869

 
$

Inventory reclassified to Other assets upon adoption of ASC 606
$
5,365

 
$

Non-cash additions to Real estate inventories - not owned and Liabilities from inventories not owned
$
52,776

 
$

See accompanying notes to condensed consolidated financial statements

6



WILLIAM LYON HOMES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1—Basis of Presentation and Significant Accounting Policies
Operations
William Lyon Homes, a Delaware corporation (“Parent” and together with its subsidiaries, the “Company”), is primarily engaged in designing, constructing, marketing and selling single-family detached and attached homes in California, Arizona, Nevada, Colorado, Washington (under the Polygon Northwest brand), Oregon (under the Polygon Northwest brand) and Texas.
Basis of Presentation
The preparation of the Company’s financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of June 30, 2018 and December 31, 2017 and revenues and expenses for the three and six month periods ended June 30, 2018 and 2017. Accordingly, actual results could differ from those estimates. The significant accounting policies using estimates include real estate inventories and cost of sales, impairment of real estate inventories, warranty reserves, loss contingencies, accounting for variable interest entities, business combinations, and valuation of deferred tax assets. The current economic environment increases the uncertainty inherent in these estimates and assumptions.
The condensed consolidated financial statements include the accounts of the Company and all majority-owned and controlled subsidiaries and joint ventures, and certain joint ventures and other entities which have been determined to be variable interest entities ("VIEs") in which the Company is considered the primary beneficiary (see Note 3). The accounting policies of the joint ventures are substantially the same as those of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.
The condensed consolidated financial statements were prepared from our books and records without audit and include all adjustments (consisting of only normal recurring accruals) necessary to present a fair statement of results for the interim periods presented. Readers of this quarterly report should refer to our audited consolidated financial statements as of and for the year ended December 31, 2017, which are included in our 2017 Annual Report on Form 10-K, as certain disclosures that would substantially duplicate those contained in the audited financial statements have not been included in this report. Also, refer to the discussion under Revenue Recognition and Change in Accounting Principle below regarding the adoption of the new standard for revenue recognition.
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (“ASU 2014-09” or “ASC 606”). Refer to Change in Accounting Principle below for further details regarding the adoption.

Home Sales
Prior to January 1, 2018, under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 605, "Revenue Recognition" ("ASC 605"), revenue was recorded when a sale was consummated, the buyer’s initial and continuing investments were adequate, any receivables were not subject to future subordination, and the usual risks and rewards of ownership had transferred to the buyer. Effective January 1, 2018, upon adoption of ASC 606, revenue is recorded upon the close of escrow, at which point home sales are considered in the scope of a contract. Accordingly, the Company does not record homebuilding revenue for performance obligations that are unsatisfied or partially unsatisfied. No revenue was recorded in the 2018 period that did not result from current period performance.

Construction Services
The Company accounted for construction management agreements using the Percentage of Completion Method in accordance with ASC 605 (prior to January 1, 2018) and ASC 606 (subsequent to January 1, 2018). Under ASC 605 and ASC 606, the Company records revenues and expenses as a contracted project progresses, and based on the percentage of costs incurred to date compared to the total estimated costs of the contract.
The Company entered into construction management agreements to build, sell and market homes in certain communities. For such services, the Company will receive fees (generally 3 to 5 percent of the sales price, as defined) and may, under certain circumstances, receive additional compensation if certain financial thresholds are achieved.


7



Real Estate Inventories
Real estate inventories are carried at cost net of impairment losses, if any. Real estate inventories consist primarily of land deposits, land and land under development, homes completed and under construction, and model homes. All direct and indirect land costs, offsite and onsite improvements and applicable interest and other carrying charges are capitalized to real estate projects during periods when the project is under development. Land, offsite costs and all other common costs are allocated to land parcels benefited based upon relative fair values before construction. Onsite construction costs and related carrying charges (principally interest and property taxes) are allocated to the individual homes within a phase based upon the relative sales value of the homes. The Company relieves its real estate inventories through cost of sales for the estimated cost of homes sold. Selling expenses and other marketing costs are expensed in the period incurred. From time to time the Company sells land to third parties. The Company does not consider these sales to be core to its homebuilding business, and any gain or loss recognized on these transactions is recorded in other non-operating income. During the three months ended June 30, 2018, the Company had two land parcel sales that resulted in a negligible gain for the period then ended. During the six months ended June 30, 2018, the Company had three land parcel sales that resulted in a negligible loss for the period then ended. During the three months ended June 30, 2017, the Company had no land parcel sales and during the six months ended June 30, 2017, the Company had one land parcel sale to a third party that did not result in any gain or loss.
A provision for warranty costs relating to the Company’s limited warranty plans is included in cost of sales and accrued expenses at the time the sale of a home is recorded. The Company generally reserves a percent of the sales price of its homes, or a set amount per home closed depending on the operating division, against the possibility of future charges relating to its warranty programs and similar potential claims. Factors that affect the Company’s warranty liability include the number of homes under warranty, historical and anticipated rates of warranty claims, and cost per claim. The Company continually assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary. Changes in the Company’s warranty liability for the six months ended June 30, 2018 and 2017, are as follows (in thousands):
 
 
Six 
 Months 
 Ended 
 June 30, 
 2018
 
Six 
 Months 
 Ended 
 June 30, 
 2017
Warranty liability, beginning of period
$
13,643

 
$
14,173

Warranty provision during period (1)
3,913

 
3,954

Warranty payments, net of insurance recoveries during period
(6,121
)
 
(6,006
)
Warranty charges related to construction services projects
16

 
85

Warranty liability, end of period
$
11,451

 
$
12,206


(1)
In connection with the RSI Acquisition (see Note 2), the Company assumed warranty liability of $0.6 million for units closed prior to the RSI Acquisition date and for which has been included in this line item for purposes of this table.
Interest incurred under the Company’s debt obligations, as more fully discussed in Note 7, is capitalized to qualifying real estate projects under development. Interest activity for the three and six months ended June 30, 2018 and 2017 are as follows (in thousands):
 
 
Three 
 Months 
 Ended 
 June 30, 
 2018
 
Three 
 Months 
 Ended 
 June 30, 
 2017
 
Six 
 Months 
 Ended 
 June 30, 
 2018
 
Six 
 Months 
 Ended 
 June 30, 
 2017
Interest incurred
$
22,808

 
$
18,822

 
$
42,066

 
$
38,246

Less: Interest capitalized
22,808

 
18,822

 
42,066

 
38,246

Interest expense, net of amounts capitalized
$

 
$

 
$

 
$

Cash paid for interest
$
1,611

 
$
8,122

 
$
33,101

 
$
27,158

Financial Instruments
Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents, receivables, and deposits. The Company typically places its cash and cash equivalents in investment grade short-

8



term instruments. Deposits, included in other assets, are due from municipalities or utility companies and are generally collected from such entities through fees assessed to other developers. The Company is an issuer of, or subject to, financial instruments, including letters of credit, with off-balance sheet risk in the normal course of business which exposes it to credit risks. These off-balance sheet financial instruments are described in more detail in Note 13.
Cash and Cash Equivalents
Short-term investments with a maturity of three months or less when purchased are considered cash equivalents. The Company’s cash and cash equivalents balance exceeds federally insurable limits as of June 30, 2018 and December 31, 2017. The Company monitors the cash balances in its operating accounts, however, these cash balances could be negatively impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, the Company has experienced no loss or lack of access to cash in its operating accounts.
Deferred Loan Costs
Deferred loan costs represent debt issuance costs and are primarily amortized to interest incurred using the straight line method which approximates the effective interest method.
Goodwill
In accordance with the provisions of ASC 350, Intangibles, Goodwill and Other, goodwill amounts are not amortized, but rather are analyzed for impairment at the reporting segment level. Goodwill is analyzed on an annual basis, or when indicators of impairment exist. We have determined that we have seven reporting segments, as discussed in Note 5, and we perform an annual goodwill impairment analysis during the fourth quarter of each fiscal year.
Intangibles
Recorded intangible assets primarily relate to brand names of acquired entities, construction management contracts, homes in backlog, and joint venture management fee contracts recorded in conjunction with FASB ASC Topic 852, Reorganizations ("ASC 852"), or FASB ASC Topic 805, Business Combinations ("ASC 805"). All intangible assets with the exception of those relating to brand names were valued based on expected cash flows related to home closings, and the asset is amortized on a per unit basis, as homes under the contracts close. Our brand name intangible assets are deemed to have an indefinite useful life.
Income per common share
The Company computes income per common share in accordance with FASB ASC Topic 260, Earnings per Share, which requires income per common share for each class of stock to be calculated using the two-class method. The two-class method is an allocation of income between the holders of common stock and a company’s participating security holders.
Basic income per common share is computed by dividing income or loss available to common stockholders by the weighted average number of shares of common stock outstanding. For purposes of determining diluted income per common share, basic income per common share is further adjusted to include the effect of potential dilutive common shares.
Income Taxes
Income taxes are accounted for under the provisions of Financial Accounting Standards Board ASC 740, Income Taxes, using an asset and liability approach. Deferred income taxes reflect the net effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating loss and tax credit carryforwards measured by applying currently enacted tax laws. A valuation allowance is provided to reduce net deferred tax assets to an amount that is more likely than not to be realized. ASC 740 prescribes a recognition threshold and a measurement criteria for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be considered “more-likely-than-not” to be sustained upon examination by taxing authorities. In addition, the Company has elected to recognize interest and penalties related to uncertain tax positions in the income tax provision.
Impact of Recent Accounting Pronouncements
Effective January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash

9



flows. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements or notes to its consolidated financial statements.
Effective January 1, 2018, the Company adopted ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)" (“ASU 2016-18”). ASU 2016-18 requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending amounts on the statement of cash flows. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements or notes to its consolidated financial statements.

Change in Accounting Principle
The Company adopted ASC 606 with a date of initial application of January 1, 2018. The Company applied ASC 606 using the cumulative effect method - i.e. by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of equity at January 1, 2018. Therefore, the comparative information has not been adjusted and continues to be reported under ASC 605.
ASC 606 replaced the guidance for costs incurred to sell real estate with new guidance codified under ASC 340-40, “Other Assets and Deferred Costs - Contracts with Customers”. The Company previously capitalized certain marketing costs related to model homes and sales offices within Real estate inventories in the balance sheet; however, effective January 1, 2018, the Company capitalized these costs within Other Assets. The method of amortization of these costs is the same under ASC 606 as per the previous guidance, resulting in no adjustment to the Company's retained earnings or equity for the comparative period. However, under ASC 606, amortization is included in Sales and marketing expense, whereas amortization was previously recorded in Cost of sales - homes in the statement of operations.
The adoption of ASC 606 did not have an impact on the amount or timing of the Company's homebuilding revenues. As of and for the three and six months ended June 30, 2018, the adoption of ASC 606 did not have a material impact on the Company's balance sheet, net income, stockholders' equity or statement of cash flows.

Note 2—Acquisition of RSI Communities
On March 9, 2018, the Company completed its acquisition of RSI Communities, a Southern California- and Texas-based homebuilder, pursuant to the Purchase and Sale Agreement (the “Purchase Agreement”) dated February 19, 2018 among California Lyon, RSI Communities, RS Equity Management L.L.C., Class B Sellers of RSI Communities, and RS Equity Management L.L.C. as the sellers’ representative, and its acquisition of three additional related real estate assets (the “Legacy Assets”) pursuant to each of the separate asset purchase agreements with each of RG Onion Creek, LLC, RSI Trails at Leander LLC and RSI Prado LLC (collectively referred to herein as "RSI Communities"), for an aggregate cash purchase price of $460.0 million, and an additional approximately $15.2 million at closing pursuant to initial working capital adjustments, a portion of which remains subject to final adjustment in accordance with the terms of the Purchase Agreement (collectively, the "RSI Acquisition") . Part of the acquired entities specific to the Southern California region now operate under the Company’s existing California segment. The remaining acquired entities now operate as a new segment of the Company in Texas, with core markets of Austin and San Antonio.
The Company financed the RSI Acquisition with a combination of proceeds from its issuance of $350 million in aggregate principal amount of 6.00% senior notes due 2023, cash on hand, and approximately $194.3 million of aggregate proceeds from a land banking arrangement with respect to land parcels in various stages of development.
As a result of the RSI Acquisition, the entities comprising the business of RSI Communities became wholly-owned direct or indirect subsidiaries of the Company, and its results are included in our condensed consolidated financial statements and related disclosures from the date of the RSI Acquisition. For the period from March 9, 2018 through June 30, 2018, home deliveries from RSI operations were 360 units. In addition, operating revenue and income before provision for income taxes for the same period were $111.5 million and $1.0 million, respectively.
The RSI Acquisition was accounted for as a business combination in accordance with ASC 805. Under ASC 805, the Company recorded the acquired assets and assumed liabilities of RSI Communities at their estimated fair values, with the excess allocated to Goodwill, as shown below. Goodwill represents the value the Company expects to achieve through the operational synergies and the expansion of the Company into new markets. The Company estimates that the entire $52.0 million of goodwill resulting from the RSI Acquisition will be tax deductible. Goodwill will be allocated to the California and Texas operating segments (see Note 5). A reconciliation of the consideration transferred as of the acquisition date is as follows:

10



Net proceeds received from RSI inventory involved in land banking transactions
$
194,131

Issuance of 6.00% Senior Notes due September 1, 2023
190,437

Cash on hand
90,653

 
475,221

As of June 30, 2018, the Company had not completed its final estimate of the fair value of the net assets of RSI Communities. As such, the estimates used as of June 30, 2018 are subject to change. The following table summarizes the preliminary amounts for acquired assets and liabilities recorded at their fair values as of the acquisition date (in thousands):
Assets Acquired
 
 
Real estate inventories
$
436,578

 
Goodwill
51,975

 
Other
6,532

 
Total Assets
$
495,085

 
 
 
Liabilities Assumed
 
 
Accounts payable
$
9,315

 
Accrued expenses
8,244

 
Notes payable
2,305

 
Total liabilities
19,864

 
Net assets acquired
$
475,221

The Company determined the fair value of real estate inventories on a project level basis using a combination of discounted cash flow models, and market comparable land transactions, where available. These methods are significantly impacted by estimates relating to i) expected selling prices, ii) anticipated sales pace, iii) cost to complete estimates, iv) highest and best use of projects prior to acquisition, and v) comparable land values. These estimates were developed and used at the individual project level, and may vary significantly between projects.
Other assets, accounts payable, accrued expenses and notes payable were generally stated at historical value due to the short-term nature of these liabilities.
The Company recorded $0.8 million and $3.1 million in acquisition related costs for the three and six months ended June 30, 2018, respectively, which are included in the Condensed Consolidated Statement of Operations in Transaction expenses. Such costs were expensed as incurred in accordance with ASC 805.

Supplemental Pro Forma Information
The following table presents unaudited pro forma amounts for the three and six months ended June 30, 2018 and June 30, 2017 as if the RSI Acquisition, had been completed as of January 1, 2017 (amounts in thousands, except per share data):
 
Three Months Ended June 30, 2018
Three Months Ended June 30, 2017
Six Months Ended June 30, 2018
Six Months Ended June 30, 2017
Operating revenues
$
519,452

$
435,213

$
933,255

$
705,691

Net income available to common stockholders
$
22,455

$
18,038

$
30,587

$
7,727

Income per share - basic
$
0.59

$
0.49

$
0.81

$
0.21

Income per share - diluted
$
0.57

$
0.47

$
0.77

$
0.20

The unaudited pro forma operating results have been determined after adjusting the unaudited operating results of RSI Communities, excluding the Legacy Assets, but including acquisition costs, to reflect the estimated purchase accounting and other acquisition adjustments. The unaudited pro forma results presented above do not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the acquired entity, the costs to combine the operations of the Company and the acquired entity or the costs necessary to achieve any of the foregoing cost savings, operating synergies or revenue enhancements. As such, the unaudited pro forma amounts are for comparative purposes

11



only and may not necessarily reflect the results of operations which would have resulted had the acquisition been completed at the beginning of the applicable period or indicative of the results that will be attained in the future.
Note 3—Variable Interest Entities and Noncontrolling Interests
As of June 30, 2018 and December 31, 2017, the Company was party to twenty-one and thirteen joint ventures, respectively, for the purpose of land development and homebuilding activities which we have determined to be VIEs. The Company, as the managing member, has the power to direct the activities of the VIEs since it manages the daily operations and has exposure to the risks and rewards of the VIEs, based upon the allocation of income and loss per the respective joint venture agreements. Therefore, the Company is the primary beneficiary of the joint ventures, and the VIEs were consolidated as of June 30, 2018 and December 31, 2017.
As of June 30, 2018, the assets of the consolidated VIEs totaled $464.5 million, of which $12.7 million was cash and cash equivalents and $448.7 million was owned real estate inventories. The liabilities of the consolidated VIEs totaled $209.4 million, primarily comprised of notes payable, accounts payable and accrued liabilities.
As of December 31, 2017, the assets of the consolidated VIEs totaled $244.7 million, of which $10.7 million was cash and cash equivalents and $230.8 million was owned real estate inventories. The liabilities of the consolidated VIEs totaled $124.5 million, primarily comprised of notes payable, accounts payable and accrued liabilities.
Note 4—Investments in Unconsolidated Joint Ventures
The table set forth below summarizes the combined unaudited statements of operations for our unconsolidated mortgage joint ventures that we accounted for under the equity method (in thousands):

 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
Revenues
$
4,179

 
$
5,073

 
$
7,888

 
$
8,462

Cost of sales
(3,009
)
 
(3,045
)
 
(4,927
)
 
(5,155
)
Income of unconsolidated joint ventures
$
1,170

 
$
2,028

 
$
2,961

 
$
3,307


Income from unconsolidated joint ventures reflected in the accompanying consolidated statements of operations represents our share of the income of our unconsolidated mortgage joint ventures, which is allocated based on the provisions of the underlying joint venture operating agreements less any additional impairments recorded against our investments in joint ventures which we do not deem recoverable.  For the three and six months ended June 30, 2018, and 2017, the Company recorded income of $0.5 million and $1.5 million and $1.2 million and $1.5 million, respectively, from its unconsolidated joint ventures. This income was primarily attributable to our share of income related to mortgages that were generated and issued to qualifying home buyers during the periods.
The table set forth below summarizes the combined unaudited balance sheets for our unconsolidated joint ventures that we accounted for under the equity method (in thousands):

12



 
 
 
 
June 30, 2018
 
December 31, 2017
Assets
 
 
 
 
 
Cash
 
$
7,632

 
$
12,802

 
Loans held for sale
 
21,411

 
17,106

 
Accounts receivable
 
578

 
2,791

 
Other assets
 
102

 
128

 
 
Total Assets
 
$
29,723

 
$
32,827

 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
Accounts payable
 
$
422

 
$
779

 
Accrued expenses
 
979

 
1,532

 
Credit lines payable
 
20,261

 
18,312

 
Other liabilities
 
234

 
31

 
Members equity
 
7,827

 
12,173

 
 
Total Liabilities and Equity
 
$
29,723

 
$
32,827

Note 5—Segment Information
The Company operates one principal homebuilding business. In accordance with FASB ASC Topic 280, Segment Reporting ("ASC 280"), the Company has determined that each of its operating divisions is an operating segment. The Company’s President and Chief Executive Officer has been identified as the chief operating decision maker. The Company’s chief operating decision maker directs the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.
The Company’s homebuilding operations design, construct and sell a wide range of homes designed to meet the specific needs in each of its markets. In accordance with ASC 280, prior to the acquisition of RSI Communities (see Note 2), the Company's homebuilding operations had been grouped into six operating segments. During the six months ended June 30, 2018, the Company added one additional operating segment, Texas as a result of the RSI Acquisition. As such, in accordance with the aggregation criteria defined by ASC 280, the Company’s homebuilding operating segments have been grouped into seven reportable segments:
California, consisting of operations in Orange, Los Angeles, San Diego, Alameda, Contra Costa, Santa Clara, Riverside and San Bernardino counties.
Arizona, consisting of operations in the Phoenix, Arizona metropolitan area.
Nevada, consisting of operations in the Las Vegas, Nevada metropolitan area.
Colorado, consisting of operations in the Denver, Colorado metropolitan area.
Washington, consisting of operations in the Seattle, Washington metropolitan area.
Oregon, consisting of operations in the Portland, Oregon metropolitan area.
Texas, consisting of operations in the Austin, Texas and San Antonio, Texas metropolitan areas.
Corporate develops and implements strategic initiatives and supports the Company’s operating segments by centralizing key administrative functions such as finance and treasury, information technology, risk management and litigation and human resources.
Segment financial information relating to the Company’s operations was as follows (in thousands):

13



 
Three 
 Months 
 Ended 
 June 30, 
 2018
 
Three 
 Months 
 Ended 
 June 30, 
 2017
 
Six 
 Months 
 Ended 
 June 30, 
 2018
 
Six 
 Months 
 Ended 
 June 30, 
 2017
Operating revenue:
 
 
 
 
 
 
 
California (1)
$
174,453

 
$
149,350

 
$
309,265

 
$
231,317

Arizona
38,764

 
52,372

 
70,803

 
79,088

Nevada
46,213

 
29,934

 
95,389

 
60,482

Colorado
62,437

 
31,008

 
102,500

 
52,338

Washington (1)
85,490

 
70,261

 
141,141

 
113,735

Oregon
66,221

 
89,767

 
113,074

 
144,586

Texas
45,874

 

 
60,648

 

Total operating revenue
$
519,452

 
$
422,692

 
$
892,820

 
$
681,546

 
 
 
 
 
 
 
 
(1) Operating revenue in the California and Washington segments include construction services revenue.
 
 
 
 
 
 
 
 
 
Three 
 Months 
 Ended 
 June 30, 
 2018
 
Three 
 Months 
 Ended 
 June 30, 
 2017
 
Six 
 Months 
 Ended 
 June 30, 
 2018
 
Six 
 Months 
 Ended 
 June 30, 
 2017
Income before provision for income taxes:
 
 
 
 
 
 
 
California
$
13,773

 
$
16,430

 
$
25,192

 
$
22,757

Arizona
4,873

 
5,416

 
7,360

 
7,714

Nevada
6,402

 
1,247

 
11,241

 
3,439

Colorado
5,617

 
1,254

 
8,781

 
1,550

Washington
11,238

 
3,771

 
15,749

 
4,085

Oregon
7,126

 
10,658

 
10,763

 
15,139

Texas
325

 

 
759

 

Corporate
(14,342
)
 
(9,320
)
 
(29,431
)
 
(18,326
)
Income before extinguishment of debt
$
35,012

 
$
29,456

 
$
50,414

 
$
36,358

Corporate - Loss on extinguishment of debt

 

 

 
(21,828
)
Income before provision for income taxes
$
35,012

 
$
29,456

 
$
50,414

 
$
14,530

 
 
June 30, 2018
 
December 31, 2017
Homebuilding assets:
 
 
 
California
$
1,093,140

 
$
631,649

Arizona
174,975

 
170,634

Nevada
204,563

 
211,202

Colorado
155,197

 
149,183

Washington
308,728

 
286,442

Oregon
384,012

 
288,981

Texas
331,150

 

Corporate (1)
226,482

 
323,013

Total homebuilding assets
$
2,878,247

 
$
2,061,104

 

14



(1)
Comprised primarily of cash and cash equivalents, deferred income taxes, receivables, lease right-of-use assets, and other assets.
Note 6—Real Estate Inventories
Real estate inventories consist of the following (in thousands):
 
 
June 30, 2018
 
December 31, 2017
Real estate inventories:
 
 
 
Land deposits
$
95,741

 
$
51,833

Land and land under development
1,210,955

 
904,410

Homes completed and under construction
930,943

 
646,198

Model homes
93,929

 
97,409

Total
$
2,331,568

 
$
1,699,850

Real estate inventories not owned (1):
 
 
 
Other land options contracts — land banking arrangement
$
247,049

 
$


(1)
Represents the consolidation of a land banking arrangement. Although the Company is not obligated to purchase the lots, based on certain factors, the Company has determined that it is economically compelled to purchase the lots in the land banking arrangement and thus, has consolidated the assets and liabilities associated with this land bank. Amounts are net of deposits.
Note 7—Senior Notes, Secured, and Unsecured Indebtedness

Senior notes, secured, and unsecured indebtedness consist of the following (in thousands):
 
June 30, 2018
 
December 31, 2017
Notes payable:
 
 
 
Revolving credit facility
$
145,000

 
$

Seller financing

 
589

Construction notes payable
1,510

 

Joint venture notes payable
161,562

 
93,926

Total notes payable
308,072

 
94,515

 
 
 
 
Senior notes:
 
 
 
3/4% Senior Notes due April 15, 2019

 
149,362

7% Senior Notes due August 15, 2022
347,107

 
346,740

6% Senior Notes due September 1, 2023
343,354

 

5 7/8% Senior Notes due January 31, 2025
440,251

 
439,567

Total senior notes
1,130,712

 
935,669

 
 
 
 
Total notes payable and senior notes
$
1,438,784

 
$
1,030,184


As of June 30, 2018, the maturities of the Notes payable, 7% Senior Notes, 6% Senior Notes, and 5 7/8% Senior Notes are as follows (in thousands):
 

15



Year Ending December 31,
 
Remaining in 2018
$
2,729

2019
42,754

2020
3,678

2021
258,911

2022
350,000

Thereafter
800,000

 
$
1,458,072

Maturities above exclude premium on the 7% Senior Notes of $0.7 million and discount on the 5 7/8% Senior Notes of $3.0 million, and deferred loan costs on the 7%, 6%, and 5 7/8% Senior Notes of $16.9 million as of June 30, 2018.
Notes Payable
Revolving Credit Facility
On May 21, 2018, California Lyon and Parent entered into a new credit agreement providing for an unsecured revolving credit facility of up to $325.0 million (the “New Facility”) with the lenders party thereto, which New Facility replaces the Company’s previous $170.0 million revolving credit facility, as described below. The New Facility will mature on May 21, 2021, unless terminated earlier pursuant to the terms of the New Facility. The New Facility contains an uncommitted accordion feature under which its aggregate principal amount can be increased to up to $500.0 million under certain circumstances, as well as a sublimit of $50.0 million for letters of credit.
The New Facility contains certain financial maintenance covenants, including (a) a minimum tangible net worth requirement of $556.4 million (which is subject to increase over time based on subsequent earnings and proceeds from equity offerings, as well as deferred tax assets to the extent included on the Company's financial statements), (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 65% as of June 30, 2018, further decreases to 60% effective as of December 31, 2018, and will remain at 60% thereafter, and (c) a covenant requiring us to maintain either (i) an interest coverage ratio (EBITDA to interest incurred, as defined therein) of at least 1.50 to 1.00 or (ii) liquidity (as defined therein) of an amount not less than the greater of our consolidated interest incurred during the trailing 12 months and $50.0 million. Our compliance with these financial covenants is measured by calculations and metrics that are specifically defined or described by the terms of the New Facility and can differ in certain respects from comparable GAAP or other commonly used terms. The New Facility also contains customary events of default, subject to cure periods in certain circumstances, including: nonpayment of principal, interest and fees or other amounts; violation of covenants; inaccuracy of representations and warranties; cross default to certain other indebtedness; unpaid judgments; and certain bankruptcy and other insolvency events. The occurrence of any event of default could result in the termination of the commitments under the New Facility and permit the Lenders to accelerate payment on outstanding borrowings under the New Facility and require cash collateralization of outstanding letters of credit. If a change of control (as defined in the New Facility) occurs, the Lenders may terminate the commitments under the New Facility and require that the Borrower repay outstanding borrowings under the New Facility and cash collateralize outstanding letters of credit. Interest rates on borrowings generally will be based on either LIBOR or a base rate, plus the applicable spread. The Company was in compliance with all covenants under the New Facility as of June 30, 2018.
Borrowings under the New Facility, the availability of which is subject to a borrowing base formula, are required to be guaranteed by the Parent and certain of the Parent’s wholly-owned subsidiaries (such subsidiaries, the “Guarantors”), and may be used for general corporate purposes. As of June 30, 2018, the commitment fee on the unused portion of the New Facility accrues at an annual rate of 0.50%. As of June 30, 2018, the Company had $145.0 million outstanding against the New Facility at an effective rate of 5.1%, as well as a letter of credit for $8.4 million.
On July 1, 2016, California Lyon and Parent had entered into an amendment and restatement agreement pursuant to which its then existing credit agreement providing for a revolving credit facility was amended and restated in its entirety (the "Second Amended Facility"). As described above, the Second Amended Facility was replaced by the New Facility on May 21, 2018. Previously, the Second Amended Facility had amended and restated the Company’s previous $130.0 million revolving credit facility and had provided for total lending commitments of $145.0 million, which had been scheduled to terminate on January 14, 2019 based on certain conditions, prior to the execution of the New Facility. In addition, the Second Amended Facility previously had an uncommitted accordion feature under which the Company could have increased the total principal amount up to a maximum aggregate of $200.0 million under certain circumstances, as well as a sublimit of $50.0 million for

16



letters of credit. On November 28, 2017, California Lyon increased the size of the commitment under its Second Amended Facility by $25.0 million to an aggregate total of $170.0 million, through exercise of the facility’s accordion feature and entry into a new lender supplement as of such date.
Pursuant to the Second Amended Facility, the maximum leverage ratio was 65% from June 30, 2016 through and including December 30, 2016, decreased to 62.5% on the last day of the 2016 fiscal year, remained at 62.5% from
December 31, 2016 through and including June 29, 2017, and was scheduled to further decrease to 60% on the last day of the
second quarter of 2017 and to remain at 60% thereafter. On June 16, 2017, California Lyon, Parent and the lenders party thereto had entered into a second amendment to the Second Amended Facility, which amended the maximum leverage ratio to extend the timing of the gradual step-downs, such that the leverage ratio remained at 62.5% through and including December 30, 2017, and decreased to 60% on the last day of the 2017 fiscal year and was scheduled to remain at 60% thereafter. On March 9, 2018, California Lyon, Parent and the lenders party thereto entered into a third amendment to the Second Amended Facility, which temporarily increased the maximum leverage ratio, such that the leverage ratio remained at 60% through and including March 30, 2018, and was scheduled to increase to 70% on March 31, 2018 through and including June 29, 2018.
The Second Amended Facility previously contained certain financial maintenance covenants. The Company was in compliance with all covenants under the Second Amended Facility through its date of termination and replacement with the New Facility on May 21, 2018.
Borrowings under the previous Second Amended Facility were required to be guaranteed by the Parent and certain of the Parent's wholly-owned subsidiaries, were secured by a pledge of all equity interests held by such guarantors, and may have been used for general corporate purposes. Interest rates on borrowings generally were based on either LIBOR or a base rate, plus the applicable spread. Through the date of termination of the Second Amended Facility, the commitment fee on the unused portion of the Second Amended Facility accrued at an annual rate of 0.50%. As of June 30, 2018, the Company had terminated the Second Amended Facility by entering into the New Facility. As of December 31, 2017, the Company had a letter of credit for $7.8 million but no outstanding balance against the previous Second Amended Facility.
Seller Financing
During the six months ended June 30, 2018, the Company paid in full prior to maturity, along with all accrued interest to date, a note payable outstanding related to a land acquisition for which seller financing was provided. The note bore interest at a rate of 7% per annum and was secured by the underlying land.
Notes Payable
The Company and certain of its consolidated joint ventures have entered into notes payable agreements. These loans will be repaid with proceeds from closings and are secured by the underlying projects. The issuance date, facility size, maturity date and interest rate of the joint ventures notes payable are listed in the table below as of June 30, 2018 (in millions):

Issuance Date
 
Facility Size
 
Outstanding
 
Maturity
 
Current Rate
 
May, 2018
 
$
70.0

 
$
68.3

 
May, 2021
 
4.98
%
(5)
May, 2018
 
13.3

 
3.7

 
June, 2020
 
4.99
%
(6)
July, 2017
 
66.2

 
45.6

 
February, 2021
 
5.13
%
(5)
January, 2016
 
35.0

 
26.5

 
February, 2019
 
5.34
%
(2)
November, 2015
 
42.5

 
16.2

 
May, 2019
 
6.00
%
(1)
November, 2014
 
1.3

 
0.1

(4)
August, 2018
 
5.50
%
(3)
March, 2014
 
4.0

 
1.2

(4)
October, 2018
 
5.07
%
(1)
 
 
$
232.3

 
$
161.6

 
 
 
 
 
(1) Loan bears interest at the Company's option of either LIBOR +3.0% or the prime rate +1.0%.
(2) Loan bears interest at LIBOR +3.25%.
(3) Loan bears interest at the prime rate +0.5%.
(4) The Company anticipates paying the borrowings in full upon the maturity date from proceeds from homes closed in the respective project.
(5) Loan bears interest at the greatest of the prime rate, federal funds effective rate +1.0%, or LIBOR +1.0%.
(6) Loan bears interest at LIBOR +2.90%.

17



In addition to the above, the Company had $1.5 million of construction notes payable outstanding related to projects that are wholly-owned by the Company.
The notes payable contain certain financial maintenance covenants. The Company was in compliance with all such covenants as of June 30, 2018.

Senior Notes
5 3/4% Senior Notes Due 2019
On March 31, 2014, California Lyon completed its private placement with registration rights of 5.75% Senior Notes due 2019 (the "5.75% Notes"), in an aggregate principal amount of $150 million. The 5.75% Notes were issued at 100% of their aggregate principal amount. In August 2014, we exchanged 100% of the initial 5.75% Notes for notes that are freely transferable and registered under the Securities Act of 1933, as amended (the “Securities Act”).
During the six months ended June 30, 2018, Parent, through California Lyon, used the net proceeds from the offering of 6.00% Senior Notes due 2023, as further described below, (i) together with cash generated from certain land banking arrangements, and cash on hand, to finance the RSI Acquisition and to pay related fees and expenses and (ii) to repay all of California Lyon's $150 million in aggregate principal amount of 5.75% Notes such that the 5.75% Notes were satisfied and discharged prior to June 30, 2018.

8 1/2% Senior Notes Due 2020

During the six months ended June 30, 2017, Parent, through California Lyon, used the net proceeds from its private placement with registration rights of 5.875% Senior Notes due 2025, as further described below, to purchase $395.6 million of the outstanding aggregate principal amount of the Company's 8.5% Senior Notes due 2020 (the "8.5% Notes"), pursuant to a cash tender offer and consent solicitation. Subsequently, the Company used the remaining proceeds, together with cash on hand, for the retirement of the remaining outstanding 8.5% Notes, such that the entire aggregate $425 million of previously outstanding 8.5% Notes are retired and extinguished as of December 31, 2017. The Company incurred certain costs related to the early extinguishment of debt of the 8.5% Notes during the six months ended June 30, 2017 in an amount of $21.8 million, which is included in the Consolidated Statement of Operations as Loss on extinguishment of debt.

7% Senior Notes Due 2022
On August 11, 2014, WLH PNW Finance Corp. (“Escrow Issuer”), completed its private placement with registration rights of 7.00% Senior Notes due 2022 (the “initial 7.00% Notes”), in an aggregate principal amount of $300 million. The initial 7.00% Notes were issued at 100% of their aggregate principal amount. On August 12, 2014, in connection with the consummation of the acquisition of Polygon Northwest Homes, Escrow Issuer merged with and into California Lyon, and California Lyon assumed the obligations of the Escrow Issuer under the initial 7.00% Notes and the related indenture by operation of law (the “Escrow Merger”). Following the Escrow Merger, California Lyon is the obligor under the initial 7.00% Notes. In January 2015, we exchanged 100% of the initial 7.00% Notes for notes that are freely transferable and registered under the Securities Act.
On September 15, 2015, California Lyon completed its private placement with registration rights of an additional $50.0 million in aggregate principal amount of its 7.00% Senior Notes due 2022 (the “additional 7.00% Notes”, and together with the initial 7.00% Notes, the "7.00% Notes") at an issue price of 102.0% of their principal amount, plus accrued interest from August 15, 2015, resulting in net proceeds of approximately $50.5 million. In January 2016, we exchanged 100% of the additional 7.00% Notes for notes that are freely transferable and registered under the Securities Act.
As of June 30, 2018, the outstanding amount of the 7.00% Notes was $350 million, excluding unamortized premium of $0.7 million and deferred loan costs of $3.5 million. The 7.00% Notes bear interest at a rate of 7.00% per annum, payable semiannually in arrears on February 15 and August 15, and mature on August 15, 2022. The 7.00% Notes are unconditionally guaranteed on a joint and several unsecured basis by Parent and certain of its existing and future restricted subsidiaries. The 7.00% Notes and the related guarantees are California Lyon’s and the guarantors’ unsecured senior obligations and rank equally in right of payment with all of California Lyon’s and the guarantors’ existing and future unsecured senior debt, including California Lyon’s $350 million in aggregate principal amount of 6.00% Senior Notes due 2023 and $450 million in aggregate principal amount of 5.875% Senior Notes due 2025, each as described below. The 7.00% Notes rank senior in right of payment to all of California Lyon’s and the guarantors’ future subordinated debt. The 7.00% Notes and the guarantees are and will be

18



effectively junior to California Lyon’s and the guarantors’ existing and future secured debt to the extent of the value of the collateral securing such debt.

6% Senior Notes Due 2023
On March 9, 2018, California Lyon completed its private placement with registration rights of 6.00% Senior Notes due 2023 (the "6.00% Notes"), in an aggregate principal amount of $350 million. The 6.00% Notes were issued at 100% of their aggregate principal amount. Parent, through California Lyon, used the net proceeds from the 6.00% Notes offering to (i) together with cash generated from certain land banking arrangements, and cash on hand, to finance the RSI Acquisition and to pay related fees and expenses and (ii) to repay all of California Lyon's $150 million of the outstanding aggregate principal amount of the 5.75% Notes.
As of June 30, 2018, the outstanding principal amount of the 6.00% Notes was $350 million, excluding deferred loan costs of $6.6 million. The 6.00% Notes bear interest at a rate of 6.00% per annum, payable semiannually in arrears on March 1 and September 1, and mature on September 1, 2023. The 6.00% Notes are unconditionally guaranteed on a joint and several unsecured basis by Parent and certain of its existing and future restricted subsidiaries. The 6.00% Notes and the related guarantees are California Lyon’s and the guarantors’ unsecured senior obligations and rank equally in right of payment with all of California Lyon’s and the guarantors’ existing and future unsecured senior debt, including California Lyon’s $350 million in aggregate principal amount of 7.00% Senior Notes due 2022, as described above and $450 million in aggregate principal amount of 5.875% Senior Notes due 2025, as described below. The 6.00% Notes rank senior in right of payment to all of California Lyon’s and the guarantors’ future subordinated debt. The 6.00% Notes and the guarantees are and will be effectively junior to California Lyon’s and the guarantors’ existing and future secured debt to the extent of the value of the collateral securing such debt.
On or after September 1, 2020, California Lyon may redeem all or a portion of the 6.00% Notes upon not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of the principal amount on the redemption date) set forth below plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date, if redeemed during the 12-month period commencing on each of the dates as set forth below:
Year
Percentage
September 1, 2020
103.00
%
September 1, 2021
101.50
%
September 1, 2022
100.00
%
Prior to September 1, 2020, the Notes may be redeemed in whole or in part at a redemption price equal to 100% of the principal amount plus a “make-whole” premium, and accrued and unpaid interest, if any, to, but not including, the redemption date.
In addition, any time prior to September 1, 2020, California Lyon may, at its option on one or more occasions, redeem Notes (including any additional notes that may be issued in the future under the 2023 Notes Indenture) in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the Notes (including any additional notes that may be issued in the future under the 2023 Notes Indenture) issued prior to such date at a redemption price (expressed as a percentage of principal amount) of 106.00%, plus accrued and unpaid interest, if any, to, but not including, the redemption date, with an amount equal to the net cash proceeds from one or more equity offerings.

5.875% Senior Notes Due 2025
On January 31, 2017, California Lyon completed its private placement with registration rights of 5.875% Senior Notes due 2025 (the "5.875% Notes"), in an aggregate principal amount of $450 million. The 5.875% Notes were issued at 99.215% of their aggregate principal amount. Parent, through California Lyon, used the net proceeds from the 5.875% Notes offering to purchase the outstanding aggregate principal amount of the 8.5% Notes such that the entire aggregate $425 million of previously outstanding 8.5% Notes are retired and extinguished as of June 30, 2018. In May 2017, the Company exchanged 100% of the 5.875% Notes for notes that are freely transferable and registered under the Securities Act.
As of June 30, 2018, the outstanding principal amount of the 5.875% Notes was $450 million, excluding unamortized discount of $3.0 million and deferred loan costs of $6.7 million. The 5.875% Notes bear interest at a rate of 5.875% per annum, payable semiannually in arrears on January 31 and July 31, and mature on January 31, 2025. The 5.875% Notes are unconditionally guaranteed on a joint and several unsecured basis by Parent and certain of its existing and future restricted

19



subsidiaries. The 5.875% Notes and the related guarantees are California Lyon’s and the guarantors’ unsecured senior obligations and rank equally in right of payment with all of California Lyon’s and the guarantors’ existing and future unsecured senior debt, including California Lyon’s $350 million in aggregate principal amount of 7.00% Senior Notes due 2022 and $350 million in aggregate principal amount of 6.00% Senior Notes due 2023, each as described above. The 5.875% Notes rank senior in right of payment to all of California Lyon’s and the guarantors’ future subordinated debt. The 5.875% Notes and the guarantees are and will be effectively junior to California Lyon’s and the guarantors’ existing and future secured debt to the extent of the value of the collateral securing such debt.

Senior Notes Covenant Compliance
The indentures governing the 7.00% Notes, the 6.00% Notes, and the 5.875% Notes contain covenants that limit the ability of Parent, California Lyon, and their restricted subsidiaries to, among other things: (i) incur or guarantee certain additional indebtedness; (ii) pay dividends, distributions, or repurchase equity or make payments in respect of subordinated indebtedness; (iii) make certain investments; (iv) sell assets; (v) incur liens; (vi) enter into agreements restricting the ability of the Company’s restricted subsidiaries to pay dividends or transfer assets; (vii) enter into transactions with affiliates; (viii) create unrestricted subsidiaries; and (viii) consolidate, merge or sell all or substantially all of its assets. These covenants are subject to a number of important exceptions and qualifications as described in the indentures. The Company was in compliance with all such covenants as of June 30, 2018.


20



GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS
The following consolidating financial information includes:
(1) Consolidating balance sheets as of June 30, 2018 and December 31, 2017; consolidating statements of operations for the three and six months ended June 30, 2018 and 2017; and consolidating statements of cash flows for the six month periods ended June 30, 2018 and 2017, of (a) William Lyon Homes, as the parent, or “Delaware Lyon”, (b) William Lyon Homes, Inc., as the subsidiary issuer, or “California Lyon”, (c) the guarantor subsidiaries, (d) the non-guarantor subsidiaries and (e) William Lyon Homes, Inc. on a consolidated basis; and
(2) Elimination entries necessary to consolidate Delaware Lyon, with California Lyon and its guarantor and non-guarantor subsidiaries.
Delaware Lyon owns 100% of all of its guarantor subsidiaries and all guarantees are full and unconditional, joint and several. As a result, in accordance with Rule 3-10 (d) of Regulation S-X promulgated by the SEC, no separate financial statements are required for these subsidiaries as of June 30, 2018 and December 31, 2017, and for the three and six month periods ended June 30, 2018 and 2017.

21




CONDENSED CONSOLIDATING BALANCE SHEET
(Unaudited)
As of June 30, 2018
(in thousands)
 
Unconsolidated
 
 
 
 
 
Delaware
Lyon
 
California
Lyon
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Company
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
30,019

 
$
6,092

 
$
13,060

 
$

 
$
49,171

Receivables

 
7,229

 
3,708

 
3,300

 

 
14,237

Escrow proceeds receivable

 

 
3,797

 

 

 
3,797

Real estate inventories

 

 

 

 

 

Owned

 
807,335

 
1,065,942

 
458,291

 

 
2,331,568

Not owned

 

 
247,049

 

 

 
247,049

Investment in unconsolidated joint ventures

 
5,545

 
150

 

 

 
5,695

Goodwill

 
14,209

 
104,668

 

 

 
118,877

Intangibles, net

 

 
6,700

 

 

 
6,700

Deferred income taxes, net

 
46,445

 

 

 

 
46,445

Lease right-of-use assets

 
16,818

 

 

 

 
16,818

Other assets, net

 
26,083

 
11,354

 
453

 

 
37,890

Investments in subsidiaries
805,625

 
22,370

 
(896,859
)
 

 
68,864

 

Intercompany receivables

 

 
281,107

 

 
(281,107
)
 

Total assets
$
805,625

 
$
976,053

 
$
833,708

 
$
475,104

 
$
(212,243
)
 
$
2,878,247

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
55,935

 
$
23,034

 
$
10,080

 
$

 
$
89,049

Accrued expenses

 
95,339

 
26,964

 
107

 

 
122,410

Liabilities from inventories not owned

 

 
247,049

 

 

 
247,049

Notes payable

 
145,000

 
1,510

 
161,562

 

 
308,072

7% Senior Notes

 
347,107

 

 

 

 
347,107

6% Senior Notes

 
343,354

 

 

 

 
343,354

5 7/8% Senior Notes

 
440,251

 

 

 

 
440,251

Intercompany payables

 
175,452

 

 
105,655

 
(281,107
)
 

Total liabilities

 
1,602,438

 
298,557

 
277,404

 
(281,107
)
 
1,897,292

Equity
 
 
 
 
 
 
 
 
 
 
 
William Lyon Homes stockholders’ equity (deficit)
805,625

 
(626,385
)
 
535,151

 
22,370

 
68,864

 
805,625

Noncontrolling interests

 

 

 
175,330

 

 
175,330

Total liabilities and equity
$
805,625

 
$
976,053

 
$
833,708

 
$
475,104

 
$
(212,243
)
 
$
2,878,247


22




CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2017
(in thousands)
 
 
Unconsolidated
 
 
 
 
 
Delaware
Lyon
 
California
Lyon
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Company
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
171,434

 
$
156

 
$
11,120

 
$

 
$
182,710

Receivables

 
4,647

 
2,252

 
3,324

 

 
10,223

Escrow proceeds receivable

 
1,594

 
1,725

 

 

 
3,319

Real estate inventories

 
831,007

 
630,384

 
238,459

 

 
1,699,850

Investment in unconsolidated joint ventures

 
7,717

 
150

 

 

 
7,867

Goodwill

 
14,209

 
52,693

 

 

 
66,902

Intangibles, net

 

 
6,700

 

 

 
6,700

Deferred income taxes, net

 
47,915

 

 

 

 
47,915

Lease right-of-use assets

 
14,454

 

 

 

 
14,454

Other assets, net

 
18,167

 
2,504

 
493

 

 
21,164

Investments in subsidiaries
780,472

 
(16,544
)
 
(494,201
)
 

 
(269,727
)
 

Intercompany receivables

 

 
269,831

 

 
(269,831
)
 

Total assets
$
780,472

 
$
1,094,600

 
$
472,194

 
$
253,396

 
$
(539,558
)
 
$
2,061,104

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
40,075

 
$
13,007

 
$
5,717

 
$

 
$
58,799

Accrued expenses

 
108,407

 
2,988

 
96

 

 
111,491

Notes payable

 
589

 

 
93,926

 

 
94,515

5 3/4% Senior Notes

 
149,362

 

 

 

 
149,362

7% Senior Notes

 
346,740

 

 

 

 
346,740

5 7/8% Senior Notes

 
439,567

 

 

 

 
439,567

Intercompany payables

 
179,788

 

 
90,043

 
(269,831
)
 

Total liabilities

 
1,264,528

 
15,995

 
189,782

 
(269,831
)
 
1,200,474

Equity

 

 

 

 

 

William Lyon Homes stockholders’ equity (deficit)
780,472

 
(169,928
)
 
456,199

 
(16,544
)
 
(269,727
)
 
780,472

Noncontrolling interests

 

 

 
80,158

 

 
80,158

Total liabilities and equity
$
780,472

 
$
1,094,600

 
$
472,194

 
$
253,396

 
$
(539,558
)
 
$
2,061,104



23




CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended June 30, 2018
(in thousands)

 
Unconsolidated
 
 
 
 
 
Delaware
Lyon
 
California
Lyon
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Company
Operating revenue
 
 
 
 
 
 
 
 
 
 
 
Sales
$

 
$
150,150

 
$
316,052

 
$
52,230

 
$

 
$
518,432

Construction services

 

 
1,020

 

 

 
1,020

Management fees

 
(1,629
)
 

 

 
1,629

 

 

 
148,521

 
317,072

 
52,230

 
1,629

 
519,452

Operating costs
 
 
 
 
 
 
 
 
 
 
 
Cost of sales

 
(117,283
)
 
(264,132
)
 
(42,528
)
 
(1,629
)
 
(425,572
)
Construction services

 

 
(959
)
 

 

 
(959
)
Sales and marketing

 
(7,700
)
 
(17,663
)
 
(3,485
)
 

 
(28,848
)
General and administrative

 
(19,315
)
 
(9,192
)
 

 

 
(28,507
)
Transaction expenses

 
(777
)
 

 

 

 
(777
)
Other

 
(680
)
 
38

 
21

 

 
(621
)
 

 
(145,755
)
 
(291,908
)
 
(45,992
)
 
(1,629
)
 
(485,284
)
Income from subsidiaries
22,455

 
5,515

 

 

 
(27,970
)
 

Operating income
22,455

 
8,281

 
25,164

 
6,238

 
(27,970
)
 
34,168

Equity in income from unconsolidated joint ventures

 
289

 
244

 

 

 
533

Other income (expense), net

 
712

 
(5
)
 
(396
)
 

 
311

Income before provision for income taxes
22,455

 
9,282

 
25,403

 
5,842

 
(27,970
)
 
35,012

Provision for income taxes

 
(7,776
)
 

 

 

 
(7,776
)
Net income
22,455

 
1,506

 
25,403

 
5,842

 
(27,970
)
 
27,236

Less: Net income attributable to noncontrolling interests

 

 

 
(4,781
)
 

 
(4,781
)
Net income available to common stockholders
$
22,455

 
$
1,506

 
$
25,403

 
$
1,061

 
$
(27,970
)
 
$
22,455



24




CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended June 30, 2017
(in thousands)
 
Unconsolidated
 
 
 
 
 
Delaware
Lyon
 
California
Lyon
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Company
Operating revenue
 
 
 
 
 
 
 
 
 
 
 
Sales
$

 
$
171,561

 
$
198,172

 
$
52,900

 
$

 
$
422,633

Construction services

 
59

 

 

 

 
59

Management fees

 
(1,089
)
 

 

 
1,089

 

 

 
170,531

 
198,172

 
52,900

 
1,089

 
422,692

Operating costs
 
 
 
 
 
 
 
 
 
 
 
Cost of sales

 
(143,633
)
 
(161,092
)
 
(47,243
)
 
(1,089
)
 
(353,057
)
Construction services

 
(6
)
 

 

 

 
(6
)
Sales and marketing

 
(7,052
)
 
(10,789
)
 
(3,443
)
 

 
(21,284
)
General and administrative

 
(15,598
)
 
(3,952
)
 

 

 
(19,550
)
Other

 
(620
)
 
55

 
5

 

 
(560
)
 

 
(166,909
)
 
(175,778
)
 
(50,681
)
 
(1,089
)
 
(394,457
)
Income from subsidiaries
18,954

 
7,405

 

 

 
(26,359
)
 

Operating income
18,954

 
11,027

 
22,394

 
2,219

 
(26,359
)
 
28,235

Equity in income from unconsolidated joint ventures

 
880

 
333

 

 

 
1,213

Other income (expense), net

 
380

 
(6
)
 
(366
)
 

 
8

Income before provision for income taxes
18,954

 
12,287

 
22,721

 
1,853

 
(26,359
)
 
29,456

Provision for income taxes

 
(9,205
)
 

 

 

 
(9,205
)
Net income
18,954

 
3,082

 
22,721

 
1,853

 
(26,359
)
 
20,251

Less: Net income attributable to noncontrolling interests

 

 

 
(1,297
)
 

 
(1,297
)
Net income available to common stockholders
$
18,954

 
$
3,082

 
$
22,721

 
$
556

 
$
(26,359
)
 
$
18,954



25




CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(Unaudited)
Six Months Ended June 30, 2018
(in thousands)

 
Unconsolidated
 
 
 
 
 
Delaware
Lyon
 
California
Lyon
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Company
Operating revenue
 
 
 
 
 
 
 
 
 
 
 
Sales
$

 
$
285,323

 
$
498,996

 
$
106,498

 
$

 
$
890,817

Construction services

 

 
2,003

 

 

 
2,003

Management fees

 
(3,379
)
 

 

 
3,379

 

 

 
281,944

 
500,999

 
106,498

 
3,379

 
892,820

Operating costs
 
 
 
 
 
 
 
 
 
 
 
Cost of sales

 
(227,528
)
 
(414,634
)
 
(87,339
)
 
(3,379
)
 
(732,880
)
Construction services

 

 
(1,942
)
 

 

 
(1,942
)
Sales and marketing

 
(16,083
)
 
(28,446
)
 
(7,012
)
 

 
(51,541
)
General and administrative

 
(37,868
)
 
(15,158
)
 
(2
)
 

 
(53,028
)
Transaction expenses

 
(3,907
)
 

 

 

 
(3,907
)
Other

 
(1,033
)
 
84

 
30

 

 
(919
)
 

 
(286,419
)
 
(460,096
)
 
(94,323
)
 
(3,379
)
 
(844,217
)
Income from subsidiaries
30,783

 
13,622

 

 

 
(44,405
)
 

Operating income
30,783

 
9,147

 
40,903

 
12,175

 
(44,405
)
 
48,603

Equity in income from unconsolidated joint ventures

 
964

 
501

 

 

 
1,465

Other income (expense), net

 
1,021

 
51

 
(726
)
 

 
346

Income before provision for income taxes
30,783

 
11,132

 
41,455

 
11,449

 
(44,405
)
 
50,414

Provision for income taxes

 
(10,590
)
 

 

 

 
(10,590
)
Net income
30,783

 
542

 
41,455

 
11,449

 
(44,405
)
 
39,824

Less: Net income attributable to noncontrolling interests

 

 

 
(9,041
)
 

 
(9,041
)
Net income available to common stockholders
$
30,783

 
$
542

 
$
41,455

 
$
2,408

 
$
(44,405
)
 
$
30,783



26




CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(Unaudited)
Six Months Ended June 30, 2017
(in thousands)

 
Unconsolidated
 
 
 
 
 
Delaware
Lyon
 
California
Lyon
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Company
Operating revenue
 
 
 
 
 
 
 
 
 
 
 
Sales
$

 
$
293,689

 
$
317,795

 
$
70,003

 
$

 
$
681,487

Construction services

 
59

 

 

 

 
59

Management fees

 
(1,602
)
 

 

 
1,602

 

 

 
292,146

 
317,795

 
70,003

 
1,602

 
681,546

Operating costs
 
 
 
 
 
 
 
 
 
 
 
Cost of sales

 
(243,028
)
 
(264,553
)
 
(62,329
)
 
(1,602
)
 
(571,512
)
Construction services

 
(6
)
 

 

 

 
(6
)
Sales and marketing

 
(13,575
)
 
(17,720
)
 
(4,694
)
 

 
(35,989
)
General and administrative

 
(30,114
)
 
(8,381
)
 
(1
)
 

 
(38,496
)
Other

 
(1,151
)
 
146

 
5

 

 
(1,000
)
 

 
(287,874
)
 
(290,508
)
 
(67,019
)
 
(1,602
)
 
(647,003
)
Income from subsidiaries
8,954

 
7,166

 

 

 
(16,120
)
 

Operating income
8,954

 
11,438

 
27,287

 
2,984

 
(16,120
)
 
34,543

Equity in income from unconsolidated joint ventures

 
924

 
538

 

 

 
1,462

Other income (expense), net

 
1,025

 
(6
)
 
(666
)
 

 
353

Income before extinguishment of debt
8,954

 
13,387

 
27,819

 
2,318

 
(16,120
)
 
36,358

Loss on extinguishment of debt

 
(21,828
)
 

 

 

 
(21,828
)
Income (loss) before benefit from income taxes
8,954

 
(8,441
)
 
27,819

 
2,318

 
(16,120
)
 
14,530

Provision for income taxes

 
(3,575
)
 

 

 

 
(3,575
)
Net income
8,954

 
(12,016
)
 
27,819

 
2,318

 
(16,120
)
 
10,955

Less: Net income attributable to noncontrolling interests

 

 

 
(2,001
)
 

 
(2,001
)
Net income (loss) available to common stockholders
$
8,954

 
$
(12,016
)
 
$
27,819

 
$
317

 
$
(16,120
)
 
$
8,954



27




CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, 2018
(in thousands)
 
 
Unconsolidated
 
 
 
 
 
Delaware
Lyon
 
California
Lyon
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Company
Operating activities
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
5,630

 
$
24,688

 
$
57,426

 
$
(203,957
)
 
$
(13,737
)
 
$
(129,950
)
Investing activities
 
 
 
 
 
 
 
 
 
 
 
Cash paid for acquisitions, net of cash acquired

 

 
(475,221
)
 

 

 
(475,221
)
Purchases of property and equipment

 
(1,844
)
 
(4,351
)
 
12

 

 
(6,183
)
Investments in subsidiaries

 
(33,399
)
 
402,658

 

 
(369,259
)
 

Net cash (used in) provided by investing activities


(35,243
)

(76,914
)

12


(369,259
)

(481,404
)
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Proceeds from borrowings on notes payable

 

 
145

 
120,594

 

 
120,739

Principal payments on notes payable

 

 
(940
)
 
(52,958
)
 

 
(53,898
)
Principal payments on 5.75% Senior Notes

 
(150,000
)
 

 

 

 
(150,000
)
Proceeds from issuance of 6.0% Senior Notes

 
350,000

 

 

 

 
350,000

Proceeds from borrowings on Revolver

 
255,000

 

 

 

 
255,000

Payments on Revolver

 
(110,000
)
 

 

 

 
(110,000
)
Payment of deferred loan costs

 
(9,340
)
 

 

 

 
(9,340
)
Shares remitted to, or withheld by the Company for employee tax withholding

 
(4,696
)
 

 

 

 
(4,696
)
Payments to repurchase common stock

 
(6,121
)
 

 

 

 
(6,121
)
Noncontrolling interest contributions

 

 

 
120,102

 

 
120,102

Noncontrolling interest distributions

 

 

 
(33,971
)
 

 
(33,971
)
Advances to affiliates

 

 
37,497

 
36,506

 
(74,003
)
 

Intercompany receivables/payables
(5,630
)
 
(455,703
)
 
(11,278
)
 
15,612

 
456,999

 

Net cash (used in) provided by financing activities
(5,630
)
 
(130,860
)
 
25,424

 
205,885

 
382,996

 
477,815

Net (decrease) increase in cash and cash equivalents


(141,415
)

5,936


1,940



 
(133,539
)
Cash and cash equivalents - beginning of period

 
171,434

 
156

 
11,120

 

 
182,710

Cash and cash equivalents - end of period
$

 
$
30,019

 
$
6,092

 
$
13,060

 
$

 
$
49,171



28



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, 2017
(in thousands)
 
 
Unconsolidated
 
 
 
 
 
Delaware
Lyon
 
California
Lyon
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Company
Operating activities
 
 
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
(1,835
)
 
$
(31,965
)
 
$
26,508

 
$
(61,355
)
 
$
1,835

 
$
(66,812
)
Investing activities
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment

 
(173
)
 
10

 
(71
)
 

 
(234
)
Investments in subsidiaries

 
(6,537
)
 
(24,140
)
 

 
30,677

 

Net cash (used in) provided by investing activities

 
(6,710
)
 
(24,130
)
 
(71
)
 
30,677

 
(234
)
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Proceeds from borrowings on notes payable

 

 

 
49,478

 

 
49,478

Principal payments on notes payable

 

 

 
(53,143
)
 

 
(53,143
)
Redemption premium of 8.5% Senior Notes

 
(19,645
)
 

 

 

 
(19,645
)
Principal payments of 8.5% Senior Notes

 
(425,000
)
 

 

 

 
(425,000
)
Proceeds from issuance of 5.875% Senior Notes

 
446,468

 

 

 

 
446,468

Proceeds from borrowings on Revolver

 
190,000

 

 

 

 
190,000

Payments on revolver

 
(154,000
)
 

 

 

 
(154,000
)
Principal payments on subordinated amortizing notes

 
(3,737
)
 

 

 

 
(3,737
)
Payment of deferred loan costs

 
(9,666
)
 

 

 

 
(9,666
)
Shares remitted to, or withheld by Company for employee tax withholding

 
(1,380
)
 

 

 

 
(1,380
)
Noncontrolling interest contributions

 

 

 
51,291

 

 
51,291

Noncontrolling interest distributions

 

 

 
(13,659
)
 

 
(13,659
)
Advances to affiliates

 

 
(17,823
)
 
13,550

 
4,273

 

Intercompany receivables/payables
1,835

 
7,774

 
15,314

 
11,862

 
(36,785
)
 

Net cash provided by (used in) financing activities
1,835

 
30,814

 
(2,509
)
 
59,379

 
(32,512
)
 
57,007

Net decrease in cash and cash equivalents

 
(7,861
)
 
(131
)
 
(2,047
)
 

 
(10,039
)
Cash and cash equivalents - beginning of period

 
36,204

 
272

 
6,136

 

 
42,612

Cash and cash equivalents - end of period
$

 
$
28,343

 
$
141

 
$
4,089

 
$

 
$
32,573


29



Note 8—Fair Value of Financial Instruments
In accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosure (“ASC 820”), the Company is required to disclose the estimated fair value of financial instruments. As of June 30, 2018 and December 31, 2017, the Company used the following assumptions to estimate the fair value of each type of financial instrument for which it is practicable to estimate:

Notes payable—The carrying amount is a reasonable estimate of fair value of the notes payable because of floating interest rate terms and/or the outstanding balance is expected to be repaid within one year.

    5 3/4% Senior Notes due April 15, 2019 —The 5 3/4% Senior Notes are traded over the counter and their fair values were based upon quotes from industry sources.

7% Senior Notes due August 15, 2022 —The 7% Senior Notes are traded over the counter and their fair values were based upon quotes from industry sources.

    6% Senior Notes due September 1, 2023 —The 6% Senior Notes are traded over the counter and their fair values were based upon quotes from industry sources.

5 7/8 Senior Notes due January 31, 2025 —The 5 7/8% Senior Notes are traded over the counter and their fair values were based upon quotes from industry sources.

The following table excludes cash and cash equivalents, receivables and accounts payable, which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments. The estimated fair values of financial instruments are as follows (in thousands):
 
 
June 30, 2018
 
December 31, 2017
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Financial liabilities:
 
 
 
 
 
 
 
Notes payable
$
308,072

 
$
308,072

 
$
94,515

 
$
94,515

5 3/4% Senior Notes due 2019

 

 
149,362

 
151,500

7% Senior Notes due 2022
347,107

 
355,705

 
346,740

 
362,250

6% Senior Notes due 2023
343,354

 
343,875

 

 

5 7/8% Senior Notes due 2025
440,251

 
423,000

 
439,567

 
459,000

ASC 820 establishes a framework for measuring fair value, expands disclosures regarding fair value measurements and defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires the Company to maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements. The Company used Level 3 to measure the fair value of its Notes payable, and Level 2 to measure the fair value of its Senior notes. ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. The three levels of the hierarchy are as follows:
Level 1—quoted prices for identical assets or liabilities in active markets;
Level 2—quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3—valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Note 9—Related Party Transactions
In November 2017, the Company entered into a Purchase and Sale Agreement (the “Oceanside PSA”) with an entity (“Oceanside Seller”) managed by an affiliate of Paulson & Co., Inc. (“Paulson”), which provides for the purchase of certain

30



real property from the Seller located in Oceanside, California for a proposed residential homebuilding development (the “St. Cloud Transaction”). The PSA provides for an overall purchase price of $22.8 million, including an aggregate deposit amount of $1.2 million (the “Deposit”), which Deposit was paid and became non-refundable in December 2017. The balance of the purchase price was paid in connection with closing of the St. Cloud Transaction in March 2018. WLH Recovery Acquisition LLC, which is affiliated with, and managed by affiliates of, Paulson, previously held over 5% of Parent’s outstanding Class A common stock, which stock was sold in its entirety in September 2017. One of the former members of Parent’s board of directors, whose term on the board expired as of May 24, 2018, had served as Portfolio Manager for the Paulson Real Estate Funds, which are affiliates of Paulson, and is a Partner in Paulson. The Company believes that the St. Cloud Transaction was on terms no less favorable than it would have agreed to with unrelated third parties.

Note 10—Income Taxes
Since inception, the Company has operated solely within the United States. The Company’s effective income tax rate was 22.2% and 21.0% and 31.3% and 24.6% for the three and six months ended June 30, 2018 and 2017, respectively. The significant drivers of the effective tax rate are allocation of income to noncontrolling interests for the three and six months June 30, 2018, and noncontrolling interests and the domestic activities deduction for the three and six months ended June 30, 2017.
Management assesses its deferred tax assets to determine whether all or any portion of the asset is more likely than not unrealizable under ASC 740. The Company is required to establish a valuation allowance for any portion of the asset that management concludes is more likely than not to be unrealizable. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company's assessment considers all evidence, both positive and negative, including the nature, frequency and severity of any current and cumulative losses, taxable income in carry back years, the scheduled reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income in making this assessment. At June 30, 2018, the Company had no valuation allowance recorded.
At June 30, 2018, the Company had no remaining federal net operating loss carryforwards and $49.9 million of remaining state net operating loss carryforwards. State net operating loss carryforwards begin to expire in 2031. In addition, as of June 30, 2018, the Company had unused federal and state built-in losses of $48.5 million and $7.5 million, respectively. The five year testing period for built-in losses expired in 2017 and the unused built-in loss carryforwards begin to expire in 2032. The Company had AMT credit carryovers of $1.4 million at June 30, 2018, which if not previously utilized are allowable as refundable credits under the Tax Cuts and Job Act through 2022.
In accordance with Securities & Exchange Commission Staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), based on the information available as of December 31, 2017, the Company recorded income tax expense of $23.1 million as a result of the Tax Cuts and Job Act ("Tax Act") due to the reduction of the Company's deferred tax assets as a result of the lower tax rate.
FASB ASC Topic 740, Income Taxes (“ASC 740”), prescribes a recognition threshold and a measurement criterion for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be considered more likely than not to be sustained upon examination by taxing authorities. The Company records interest and penalties related to uncertain tax positions as a component of the provision for income taxes. The Company has no unrecognized tax benefits.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is subject to U.S. federal income tax examination for calendar tax years ended 2012 and forward. The Company is subject to various state income tax examinations for calendar tax years ended 2008 and forward. The Company is currently under examination by the Internal Revenue Service for the 2013 and 2014 tax years and under examination by California for the 2014 tax year.

31



Note 11—Income Per Common Share
Basic and diluted income per common share for the three and six months ended June 30, 2018 and 2017 were calculated as follows (in thousands, except number of shares and per share amounts):
 
 
Three 
 Months 
 Ended 
 June 30, 
 2018
 
Three 
 Months 
 Ended 
 June 30, 
 2017
 
Six 
 Months 
 Ended 
 June 30, 
 2018
 
Six 
 Months 
 Ended 
 June 30, 
 2017
Basic weighted average number of common shares outstanding
38,017,211

 
37,051,967

 
37,974,471

 
36,980,540

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options, unvested common shares, and warrants
1,671,060

 
1,246,657

 
1,797,966

 
1,250,661

Diluted average shares outstanding
39,688,271

 
38,298,624

 
39,772,437

 
38,231,201

Net income available to common stockholders
$
22,455

 
$
18,954

 
$
30,783

 
$
8,954

Basic income per common share
$
0.59

 
$
0.51

 
$
0.81

 
$
0.24

Dilutive income per common share
$
0.57

 
$
0.49

 
$
0.77

 
$
0.23

Antidilutive securities not included in the calculation of diluted income per common share (weighted average):
 
 
 
 
 
 
 
Tangible equity units

 
894,930

 

 
894,930

Unvested stock options

 
240,000

 

 
240,000


Note 12—Stock Based Compensation
We account for share-based awards in accordance with ASC Topic 718, Compensation-Stock Compensation, which requires the fair value of stock-based compensation awards to be amortized as an expense over the vesting period. Stock-based compensation awards are valued at the fair value on the date of grant. Compensation expense for awards with performance based conditions is recognized over the vesting period once achievement of the performance condition is deemed probable.
During the three and six months ended June 30, 2018, the Company granted 4,292 and 241,573 shares of time-based restricted stock, respectively. During the three and six months ended June 30, 2018, the Company granted no shares and 426,075 shares, respectively, of performance based restricted stock. On the Consolidated Balance Sheets and Statement of Equity, the Company considers unvested shares of restricted stock to be issued, but not outstanding.
The Company recorded total stock based compensation expense during the three and six months ended June 30, 2018 and 2017 of $2.0 million and $5.2 million and $1.5 million and $3.2 million, respectively.


Performance-Based Restricted Stock Awards

With respect to the performance based restricted stock awards granted to certain employees during the six months ended June 30, 2018, the actual number of such shares of restricted stock that will be earned (the “Earned Shares”) is subject to the Company’s achievement of pre-established performance targets as of the end of the 2018 fiscal year. Of the aforementioned awards, 373,432 of such Earned Shares vest in three equal annual installments on March 1st of each of 2019, 2020 and 2021, subject to each grantee’s continued service through each vesting date. The remaining 52,643 of such Earned Shares vest in three equal annual installments on each anniversary of the grant date, subject to each grantee’s continued service through each vesting date. Based on the probability assessment as of June 30, 2018, management determined that the currently available data was not sufficient to support that the achievement of the performance targets is probable, and as such, no compensation expense has been recognized for these awards to date.

Time-Based Restricted Stock Awards
With respect to the restricted stock awards granted to certain employees and non-employee directors during the three and six months ended June 30, 2018, 116,484 of such shares vest in three equal annual installments on March 1st of each of 2019, 2020 and 2021, 4,767 of such shares vest in two equal annual installments on March 1st of each of 2019 and 2020, 26,321 of

32



such shares vest in three equal annual installments on each anniversary of the grant date, 35,756 of such shares vest in two equal annual installments on each anniversary of the grant date, and 36,317 of such shares vest in one installment on the second anniversary of the grant date, in each case subject to each grantee’s continued service through each vesting date, and 21,928 of such shares vest in four equal quarterly installments on each three-month period beginning June 1st of 2018, subject to each grantee’s continued service on the board through each vesting date.

Note 13—Commitments and Contingencies
The Company’s commitments and contingent liabilities include the usual obligations incurred by real estate developers in the normal course of business. In the opinion of management, these matters will not have a material effect on the Company’s condensed consolidated financial position, results of operations or cash flows.
The Company is a defendant in various lawsuits related to its normal business activities. We believe that the accruals we have recorded for probable and reasonably estimable losses with respect to these proceedings are adequate and that, as of June 30, 2018, it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the estimated amounts already recognized on our condensed consolidated financial statements. We evaluate our accruals for litigation and regulatory proceedings, and as appropriate, adjust them to reflect (i) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings and other relevant events and developments; (ii) the advice and analyses of counsel; and (iii) the assumptions and judgment of management. Similar factors and considerations are used in establishing new accruals for proceedings as to which losses have become probable and reasonably estimable at the time an evaluation is made. The outcome of any of these proceedings, including the defense and other litigation-related costs and expenses we may incur, however, is inherently uncertain and could differ significantly from the estimate reflected in a related accrual, if made. Therefore, it is possible that the ultimate outcome of any proceeding, if in excess of a related accrual or if no accrual had been made, could be material to our consolidated financial statements.
The Company had outstanding performance and surety bonds of $266.0 million at June 30, 2018, related principally to its obligations for site improvements at various projects. The Company does not believe that draws upon these bonds, if any, will have a material effect on the Company’s financial position, results of operations or cash flows. As of June 30, 2018, the Company had $474.7 million of project commitments relating to the construction of projects.
See Note 7 for additional information relating to the Company’s guarantee arrangements.
In addition to the land bank agreement discussed below, the Company has entered into various purchase option agreements with third parties to acquire land. As of June 30, 2018, the Company has made non-refundable deposits of $95.7 million. The Company is under no obligation to purchase the land, but would forfeit remaining deposits if the land were not purchased. The total remaining purchase price under the option agreements is $936.2 million as of June 30, 2018.

Land Banking Arrangements
The Company enters into purchase agreements with various land sellers. As a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Company’s available cash or other corporate financing sources and limiting the Company’s risk, the Company transfers the Company’s right in such purchase agreements to entities owned by third parties (“land banking arrangements”). These entities use equity contributions and/or incur debt to finance the acquisition and development of the land. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit of 15% to 25% of the total purchase price. The Company is under no obligation to purchase the balance of the lots, but would forfeit any existing deposits and could be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. These land banking arrangements help the Company manage the financial and market risk associated with land holdings. As discussed above, with exception of the arrangement discussed below, these amounts are included in the total remaining purchase price mentioned above.
The Company participated in one land banking arrangement during the six months ended June 30, 2018, which was not a VIE in accordance with ASC 810, but which is consolidated in accordance with FASB ASC Topic 470, Debt (“ASC 470”). Under the provisions of ASC 470, the Company had determined it is economically compelled, based on certain factors, to purchase the land in the land banking arrangement. Therefore, the Company has recorded the remaining purchase price of the land of $247.0 million as of June 30, 2018, which was included in Real estate inventories not owned and Liabilities from inventories not owned in the accompanying balance sheet.
Summary information with respect to the Company’s consolidated land banking arrangements is as follows as of the period presented (dollars in thousands):

33



 
 
June 30, 2018
Total number of land banking projects consolidated
 
1

Total number of lots
 
3,181

Total purchase price
 
$
316,452

Balance of lots still under option and not purchased:
 

Number of lots
 
2,864

Purchase price
 
$
284,165

Forfeited deposits if lots are not purchased
 
$
37,116


Lease Obligations
Lease obligations, as included in Accrued expenses on the consolidated balance sheets, were $16.8 million as of June 30, 2018 and $14.5 million as of December 31, 2017. The Company has non-cancelable operating leases primarily associated with office facilities, real estate and office equipment, in addition to one related sublease for an office facility. The determination of which discount rate to use when measuring the lease obligation was deemed a significant judgment. Lease cost, as included in general and administrative expense in our consolidated statements of operations for the respective periods, and additional information regarding lease terms are as follows (dollars in thousands):
 
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Six 
 Months 
 Ended 
 June 30, 
 2018
 
Six 
 Months 
 Ended 
 June 30, 
 2017
Lease cost
 
 
 
 
 
 
 
 
Operating lease cost
 
$
2,044

 
$
1,718

 
$
4,053

 
$
2,713

Sublease income
 
(29
)
 
(29
)
 
(58
)
 
(58
)
Total lease cost
 
$
2,015

 
$
1,689

 
$
3,995

 
$
2,655

 
 
 
 
 
 
 
 
 
Other information
 
 
 
 
 
 
 
 
Cash paid for amounts included in the measurement of lease liabilities for operating leases:
 
 
 
 
 
 
 
 
Operating cash flows
 
$
1,779

 
$
1,371

 
$
3,546

 
$
2,258

Right-of-use assets obtained in exchange for new operating lease liabilities
 
$
3,691

 
$
410

 
$
5,387

 
$
5,058

Weighted-average discount rate
 
6.5
%
 
6.6
%
 
6.5
%
 
6.6
%
 
 
June 30, 2018
 
December 31, 2017
Weighted-average remaining lease term (in years)
 
4.08
 
3.58
The table below shows the future minimum payments under non-cancelable operating leases at June 30, 2018 (in thousands).
 
Year Ending December 31,
 
Remaining in 2018
$
4,014

2019
5,756

2020
4,779

2021
4,464

2022
3,191

Thereafter
3,871

Total
$
26,075


34




Note 14—Subsequent Events
No events have occurred subsequent to June 30, 2018, that would require recognition or disclosure in the Company’s financial statements.

35



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
WILLIAM LYON HOMES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company is one of the largest Western U.S. regional homebuilders. Headquartered in Newport Beach, California, the Company is primarily engaged in the design, construction, marketing and sale of single-family detached and attached homes in California, Arizona, Nevada, Colorado, Oregon, Washington and Texas. The Company’s core markets include Orange County, Los Angeles, the Inland Empire, the San Francisco Bay Area, Phoenix, Las Vegas, Denver, Portland, Seattle, Austin and San Antonio. The Company has a distinguished legacy of more than 60 years of homebuilding operations, over which time it has sold in excess of 104,000 homes. For the six months ended June 30, 2018 (the "2018 period"), the Company had revenues from homes sales of $890.8 million, a 31% increase from $681.5 million for the six months ended June 30, 2017 (the "2017 period"), which includes results from all seven reportable operating segments. The Company had net new home orders of 2,376 homes in the 2018 period, a 26% increase from 1,882 in the 2017 period, while the average number of sales locations increased 11% to 94 in the 2018 period from 85 in the 2017 period.
The following discussion of results of operations and financial condition contains forward-looking statements reflecting current expectations that involve risks and uncertainties. See the section titled, “CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS” included elsewhere in this Quarterly Report on Form 10-Q. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in such section.
Basis of Presentation
The accompanying condensed consolidated financial statements included herein have been prepared under U.S. Generally Accepted Accounting Principles ("U.S. GAAP"), and the rules and regulations of the Securities and Exchange Commission (the "SEC"), and are presented on a going concern basis, which assumes the Company will be able to operate in the ordinary course of its business and realize its assets and discharge its liabilities for the foreseeable future.
Results of Operations
In the six months ended June 30, 2018, the Company delivered 1,822 homes, with an average sales price ("ASP") of approximately $488,900, and recognized home sales revenue of $890.8 million. The Company generated net income available to common shareholders of $30.8 million for the six months ended June 30, 2018, and income per share of $0.81. The Company continues to see positive trends in orders, price appreciation in many projects, and our average sales price of homes in backlog is approximately $526,500 as of June 30, 2018, which is 8% higher than the average sales price of homes closed for the six months ended June 30, 2018 of $488,900.
On March 9, 2018, the Company completed its acquisition of the residential homebuilding operations of RSI Communities and its affiliates, such operations being referred herein as "RSI Communities", which marked the beginning of the Texas operating segment, in addition to expanding the Company's footprint in the California operating segment. Financial data herein as of June 30, 2018, and for the three and six months ended June 30, 2018 include operations for these operating segments for the period from April 1, 2018 through June 30, 2018 and March 9, 2018 (date of acquisition) through June 30, 2018, respectively.
As of June 30, 2018, the Company was selling homes in 110 communities, including 34 communities added in conjunction with the acquisition of RSI Communities. We had a consolidated backlog of 1,648 homes sold but not closed, with an associated sales value of $867.7 million, representing a 28% increase in units, and a 15% increase in dollar value, as compared to the backlog at June 30, 2017.
Homebuilding gross margin percentage and adjusted homebuilding gross margin percentage was 17.7% and 23.0%, respectively, for the six months ended June 30, 2018, as compared to 16.1% and 20.9%, respectively, for the six months ended June 30, 2017.
Comparisons of the Three Months Ended June 30, 2018 to June 30, 2017
Revenues from homes sales increased 23% to $518.4 million during the three months ended June 30, 2018, compared to $422.6 million during the three months ended June 30, 2017. The increase in revenue is primarily due to the 30% increase in

36



the number of homes closed during the 2017 period. The number of net new home orders for the three months ended June 30, 2018 increased 25% to 1,270 homes from 1,017 homes for the three months ended June 30, 2017.
 
Three Months Ended June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
%
Number of Net New Home Orders
 
 
 
 
 
 
 
California
337

 
280

 
57

 
20
 %
Arizona
118

 
149

 
(31
)
 
(21
)%
Nevada
115

 
93

 
22

 
24
 %
Colorado
160

 
86

 
74

 
86
 %
Washington
136

 
164

 
(28
)
 
(17
)%
Oregon
199

 
245

 
(46
)
 
(19
)%
Texas
205

 
N/A

 
N/M

 
N/M

Total
1,270

 
1,017

 
253

 
25
 %
The 25% increase in net new homes orders is driven by a 22% increase in average number of sales locations to 107 average locations in 2018, compared to 88 in the 2017 period, which is driven by the 34 communities added in conjunction with the acquisition of RSI Communities and opening of 7 new communities in the legacy operating segments, less any projects that closed out. In addition, the increase was also a result of an increase in monthly absorption to 4.0 sales per month from 3.9 in the prior year period.
 
Three Months Ended June 30,
 
Increase (Decrease)
 
2018
 
2017
 
%
Cancellation Rates
 
 
 
 
 
California
14
%
 
15
%
 
(1
)%
Arizona
6
%
 
6
%
 
 %
Nevada
20
%
 
15
%
 
5
 %
Colorado
9
%
 
10
%
 
(1
)%
Washington
6
%
 
17
%
 
(11
)%
Oregon
10
%
 
14
%
 
(4
)%
Texas
17
%
 
N/A

 
N/M

Overall
12
%
 
14
%
 
(2
)%
Cancellation rates during the 2018 period decreased to 12% from 14% during the 2017 period. Cancellation rates typically are driven by personal factors affecting buyers and may not be indicative of any overarching trends affecting regions.
 
Three Months Ended June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
%
Average Number of Sales Locations
 
 
 
 
 
 
 
California
28

 
23

 
5

 
22
 %
Arizona
6

 
8

 
(2
)
 
(25
)%
Nevada
14

 
14

 

 
 %
Colorado
15

 
15

 

 
 %
Washington
10

 
10

 

 
 %
Oregon
14

 
18

 
(4
)
 
(22
)%
Texas
20

 
N/A

 
N/M

 
N/M

Total
107

 
88

 
19

 
22
 %
The average number of sales locations for the Company increased to 107 locations for the three months ended June 30, 2018 compared to 88 for the three months ended June 30, 2017, driven by the 34 communities added in conjunction with the

37



acquisition of RSI Communities. During the period, the Company opened 7 communities, while closing out 7 in the legacy operating segments.
 
Three Months Ended June 30, 2018
 
Increase (Decrease)
 
2018
 
2017
 
Quarterly Absorption Rates
 
 
 
 
 
California
12.0
 
12.2
 
(0.2)
Arizona
19.7
 
18.6
 
1.1
Nevada
8.2
 
6.6
 
1.6
Colorado
10.7
 
5.7
 
5.0
Washington
13.6
 
16.4
 
(2.8)
Oregon
14.2
 
13.6
 
0.6
Texas
10.3
 
N/A
 
N/M
Overall
11.9
 
11.6
 
0.3
The Company's consolidated quarterly absorption rate, representing the number of net new home orders divided by average sales locations for the period, increased for the three months ended June 30, 2018 to 11.9 sales per project from 11.6 in the 2017 period. The Colorado segment has experienced increased absorption due to product offerings at price points below the local median home price.
 
 
June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
%
Backlog (units)
 
 
 
 
 
 
 
California
457

 
432

 
25

 
6
 %
Arizona
159

 
206

 
(47
)
 
(23
)%
Nevada
145

 
128

 
17

 
13
 %
Colorado
238

 
126

 
112

 
89
 %
Washington
174

 
192

 
(18
)
 
(9
)%
Oregon
236

 
201

 
35

 
17
 %
Texas
239

 
N/A

 
N/M

 
N/M

Total
1,648

 
1,285

 
363

 
28
 %
The Company’s backlog at June 30, 2018 increased 28% to 1,648 units from 1,285 units at June 30, 2017. The increase is primarily attributable to an increase in net new home orders to 1,270 in the current period from 1,017 in the prior year.
 
June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
%
 
(dollars in thousands)
Backlog (dollars)
 
 
 
 
 
 
 
California
$
346,687

 
$
345,604

 
$
1,083

 
 %
Arizona
50,048

 
63,435

 
(13,387
)
 
(21
)%
Nevada
95,759

 
84,348

 
11,411

 
14
 %
Colorado
99,531

 
59,266

 
40,265

 
68
 %
Washington
118,863

 
115,018

 
3,845

 
3
 %
Oregon
92,270

 
87,652

 
4,618

 
5
 %
Texas
64,503

 
N/A

 
N/M

 
N/M

Total
$
867,661

 
$
755,323

 
$
112,338

 
15
 %
The dollar amount of backlog of homes sold but not closed as of June 30, 2018 was $867.7 million, up 15% from $755.3 million as of June 30, 2017. The increase primarily reflects an increase in net new orders as described above, slightly offset by

38



a 10% decrease in the average sales price of homes in backlog when compared with the prior period. The increase in the dollar amount of backlog of homes sold but not closed as described above generally results in an increase in operating revenues in the subsequent period as compared to the previous period.
In California, the dollar amount of backlog remained relatively consistent at $346.7 million as of June 30, 2018 and $345.6 million as of June 30, 2017. This was due to the offset of the 6% increase in units in backlog by the decrease in ASP of homes in backlog for the 2017 period of 5% to $758,600 from $800,000 for the 2017 period. 
In Arizona, the dollar amount of backlog decreased 21% to $50.0 million as of June 30, 2018 from $63.4 million as of June 30, 2017, which is primarily attributable to a 23% decrease in the number of homes in backlog to 159 at June 30, 2018, from 206 at June 30, 2017 due to a 21% decrease in new home orders. This was partially offset by a 2% increase in the ASP of homes in backlog when compared with the prior period.
In Nevada, the dollar amount of backlog increased 14% to $95.8 million as of June 30, 2018 from $84.3 million as of June 30, 2017, primarily attributable to a 13% increase in units in backlog, to 145 as of June 30, 2018 from 128 as of June 30, 2017.
In Colorado, the dollar amount of backlog increased 68% to $99.5 million as of June 30, 2018 from $59.3 million as of June 30, 2017, which is attributable to an 89% increase in the number of units in backlog, to 238 units as of June 30, 2018, from 126 units as of June 30, 2017. This was slightly offset by an 11% decrease of the ASP of homes in backlog to $418,200 as of June 30, 2018 from $470,400 as of June 30, 2017.
In Washington, the dollar amount of backlog increased 3% to $118.9 million as of June 30, 2018 from $115.0 million as of June 30, 2017, which is attributable to a 14% increase in the ASP of homes in backlog to $683,100 as of June 30, 2018 from $599,100 as of June 30, 2017, largely offset by a 9% decrease in the number of units in backlog, to 174 units as of June 30, 2018, from 192 units as of June 30, 2017.
In Oregon, the dollar amount of backlog increased 5% to $92.3 million as of June 30, 2018 from $87.7 million as of June 30, 2017, which is primarily attributable to a 17% increase in the number of units in backlog, to 236 units as of June 30, 2018, from 201 units as of June 30, 2017, partially offset by a 10% decrease in the ASP of homes in backlog to $391,000 in the 2018 period from $436,100 in the 2017 period.
In Texas, which is a new operating segment resulting from the acquisition of RSI Communities, the dollar amount of backlog was $64.5 million, with units in backlog of 239, for which there are no comparable amounts as of June 30, 2017.
 
Three Months Ended June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
%
Number of Homes Closed
 
 
 
 
 
 
 
California
268

 
216

 
52

 
24
 %
Arizona
123

 
181

 
(58
)
 
(32
)%
Nevada
91

 
53

 
38

 
72
 %
Colorado
145

 
58

 
87

 
150
 %
Washington
138

 
106

 
32

 
30
 %
Oregon
140

 
217

 
(77
)
 
(35
)%
Texas
177

 
N/A

 
N/M

 
N/M

Total
1,082

 
831

 
251

 
30
 %

During the three months ended June 30, 2018, the number of homes closed increased 30% to 1,082 from 831 in the 2017 period. The increase was primarily attributable to an increase in homes closed in every operating segment except Arizona and Oregon, which were due to their lower community count, in addition to the new home deliveries resulting from the acquisition of RSI Communities.

39



 
Three Months Ended June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
%
 
(dollars in thousands)
Home Sales Revenue
 
 
 
 
 
 
 
California
$
174,453

 
$
149,291

 
$
25,162

 
17
 %
Arizona
38,764

 
52,372

 
(13,608
)
 
(26
)%
Nevada
46,213

 
29,934

 
16,279

 
54
 %
Colorado
62,437

 
31,008

 
31,429

 
101
 %
Washington
84,470

 
70,261

 
14,209

 
20
 %
Oregon
66,221

 
89,767

 
(23,546
)
 
(26
)%
Texas
45,874

 
N/A

 
N/M

 
N/M

Total
$
518,432

 
$
422,633

 
$
95,799

 
23
 %
The 23% increase in homebuilding revenue is driven by the 30% increase in homes closed discussed above, slightly offset by the 6% decrease in the average sales price of homes closed between the 2018 and 2017 periods, which is primarily driven by product and geographical mix, and was impacted by the lower price point from the new Texas operating segment, which is below the Company average.
 
 
Three Months Ended June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
%
Average Sales Price of Homes Closed
 
 
 
 
 
 
 
California
$
650,900

 
$
691,200

 
$
(40,300
)
 
(6
)%
Arizona
315,200

 
289,300

 
25,900

 
9
 %
Nevada
507,800

 
564,800

 
(57,000
)
 
(10
)%
Colorado
430,600

 
534,600

 
(104,000
)
 
(19
)%
Washington
612,100

 
662,800

 
(50,700
)
 
(8
)%
Oregon
473,000

 
413,700

 
59,300

 
14
 %
Texas
259,200

 
N/A

 
N/M

 
N/M

Company Average
$
479,100

 
$
508,600

 
$
(29,500
)
 
(6
)%

The average sales price of homes closed during the 2018 period decreased 6% primarily due to product and geographical mix, and was impacted by the lower price point from the new Texas operating segment.
Construction Services Revenue
Construction services revenue was $1.0 million for the three months ended June 30, 2018, which was attributable to one project in Washington.
Gross Margin
Homebuilding gross margins increased to 17.9% for the three months ended June 30, 2018 from 16.5% in the 2017 period, primarily driven by product and geographic mix for home deliveries, as well as new projects with closings above the previous Company averages. In addition, the increase is partially due to the Company's adoption of ASC 606, which resulted in the reclass of the amortization of capitalized costs associated with model homes and sales offices to Sales and marketing expense, previously recorded in Cost of sales - homes, as described in more detail in the notes to the financial statements.
For the comparison of the three months ended June 30, 2018 and the three months ended June 30, 2017, adjusted homebuilding gross margin percentage, which excludes previously capitalized interest included in cost of sales as well as the effect of adjustments recorded in relation to purchase accounting, was 23.3% for the 2018 period compared to 21.4% for the 2017 period. The increase was primarily a result of the increase in homebuilding gross margins described above coupled with the increase in the impact of interest in cost of sales.

40



Adjusted homebuilding gross margin is a non-GAAP financial measure. The Company believes this information is meaningful as it isolates the impact that interest and purchase accounting have on homebuilding gross margin and permits investors to make better comparisons with the Company's competitors, who also break out and adjust gross margins in a similar fashion. For comparative purposes, purchase accounting is the net adjustment in basis related to the RSI Acquisition, specifically recorded to the California and Texas operating divisions. In the comparative presentation below, purchase accounting amounts related to previous acquisitions have been excluded from both periods. See table set forth below reconciling this non-GAAP measure to homebuilding gross margin.
 
Three Months Ended June 30,
 
2018
 
2017
 
(dollars in thousands)
Home sales revenue
$
518,432

 
$
422,633

Cost of home sales
425,572

 
353,057

Homebuilding gross margin
92,860

 
69,576

Homebuilding gross margin percentage
17.9
%
 
16.5
%
Add: Interest in cost of sales
22,329

 
20,689

Add: Purchase accounting adjustments
5,385

 

Adjusted homebuilding gross margin
$
120,574

 
$
90,265

Adjusted homebuilding gross margin percentage
23.3
%
 
21.4
%
Sales and Marketing, General and Administrative
 
Three Months Ended June 30,
 
As a Percentage of Home Sales Revenue
 
2018
 
2017
 
2018
 
2017
 
(dollars in thousands)
 
 
 
 
Sales and Marketing
$
28,848

 
$
21,284

 
5.6
%
 
5.0
%
General and Administrative
28,507

 
19,550

 
5.5
%
 
4.6
%
Total Sales and Marketing & General and Administrative
$
57,355

 
$
40,834

 
11.1
%
 
9.7
%
Sales and marketing expense as a percentage of home sales revenue increased to 5.6% in the 2018 period compared to 5.0% in the 2017 period, primarily due to the adoption of ASC 606, which resulted in the reclass of the amortization of certain capitalized costs associated with model homes and sales offices to Sales and marketing expense, previously recorded in Cost of sales - homes, as described in more detail in the notes to the financial statements. General and administrative expense increased to 5.5% in the 2018 period compared to 4.6% in the 2017 period due to an increased headcount as a result of the RSI acquisition.
Transaction Expenses
Transaction expenses relate entirely to one-time, non-recurring costs incurred in relation to the acquisition of RSI Communities on March 9, 2018.
Equity in Income of Unconsolidated Joint Ventures
Equity in income of unconsolidated joint ventures decreased to $0.5 million for the three months ended June 30, 2018 from $1.2 million during the comparable 2017 period.
Other Items
Interest activity for the three months ended June 30, 2018 and June 30, 2017 is as follows (in thousands): 

41



 
Three Months Ended June 30,
 
2018
 
2017
Interest incurred
$
22,808

 
$
18,822

Less: Interest capitalized
22,808

 
18,822

Interest expense, net of amounts capitalized
$

 
$

Cash paid for interest
$
1,611

 
$
8,122

The decrease in cash paid for interest for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 was due to timing of payments on interest for the Company's Senior Notes. The Company capitalized all of the interest it incurred during both periods presented due to its qualifying assets exceeding its outstanding debt.
During the three months ended June 30, 2018, the Company had two land parcel sales that resulted in a negligible gain.
Provision for Income Taxes
During the three months ended June 30, 2018, the Company recorded a provision for income taxes of $7.8 million, for an effective tax rate of 22.2%. During the three months ended June 30, 2017, the Company recorded a provision for income taxes of $9.2 million for an effective tax rate of 31.3%. The decrease in the Company's effective tax rate is due to the overall favorable impact of the Tax Cuts and Job Act ("Tax Act").

Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests increased to $4.8 million during the 2018 period, compared to $1.3 million during the 2017 period.
Net Income Available to Common Stockholders
As a result of the foregoing factors, net income available to common stockholders for the three months ended June 30, 2018 was $22.5 million, compared to net income available to common stockholders for the three months ended June 30, 2017 was $19.0 million.
Lots Owned and Controlled
The table below summarizes the Company’s lots owned and controlled as of the periods presented:
 

42



 
June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
%
Lots Owned
 
 
 
 
 
 
 
California
3,921

 
1,653

 
2,268

 
137
 %
Arizona
3,993

 
4,660

 
(667
)
 
(14
)%
Nevada
2,822

 
2,941

 
(119
)
 
(4
)%
Colorado
1,130

 
1,415

 
(285
)
 
(20
)%
Washington
1,327

 
1,303

 
24

 
2
 %
Oregon
2,623

 
1,449

 
1,174

 
81
 %
Texas
3,398

 

 
3,398

 
N/M

Total
19,214

 
13,421

 
5,793

 
43
 %
Lots Controlled (1)
 
 
 
 
 
 
 
California
2,022

 
1,141

 
881

 
77
 %
Arizona
651

 

 
651

 
N/M

Nevada
3

 
420

 
(417
)
 
(99
)%
Colorado
1,197

 
192

 
1,005

 
523
 %
Washington
1,334

 
973

 
361

 
37
 %
Oregon
1,456

 
2,386

 
(930
)
 
(39
)%
Texas
3,629

 

 
3,629

 
N/M

Total
10,292

 
5,112

 
5,180

 
101
 %
Total Lots Owned and Controlled
29,506

 
18,533

 
10,973

 
59
 %
 
(1)
Lots controlled may be purchased by the Company as consolidated projects or may be purchased by newly formed joint ventures.
Total lots owned and controlled has increased to 29,506 lots owned and controlled at June 30, 2018 from 18,533 lots at June 30, 2017, primarily due to the acquisition of RSI Communities. Certain lots included in lots owned in California and Texas are associated with a land banking transaction that is consolidated on the Company’s accompanying balance sheet in accordance with ASC 470, as further discussed below.
Comparisons of the Six Months Ended June 30, 2018 to June 30, 2017
Revenues from homes sales increased 31% to $890.8 million during the six months ended June 30, 2018, compared to $681.5 million during the six months ended June 30, 2017. The increase in revenue is primarily due to the 37% increase in the number of homes closed during the 2018 period. The number of net new home orders for the six months ended June 30, 2018 increased 26% to 2,376 homes from 1,882 homes for the six months ended June 30, 2017.
 
Six Months Ended June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
%
Number of Net New Home Orders
 
 
 
 
 
 
 
California
620

 
545

 
75

 
14
 %
Arizona
226

 
277

 
(51
)
 
(18
)%
Nevada
224

 
170

 
54

 
32
 %
Colorado
304

 
147

 
157

 
107
 %
Washington
315

 
316

 
(1
)
 
 %
Oregon
408

 
427

 
(19
)
 
(4
)%
Texas
279

 
N/A

 
N/M

 
N/M

Total
2,376

 
1,882

 
494

 
26
 %
The 26% increase in net new homes orders is driven by an 11% increase in average number of sales locations to 94 average locations in 2018, compared to 85 in the 2017 period, which is driven by the 34 communities added in conjunction

43



with the acquisition of RSI Communities and opening of 18 new communities in the legacy operating segments, less any projects that closed out.
 
Six Months Ended June 30,
 
Increase (Decrease)
 
2018
 
2017
 
%
Cancellation Rates
 
 
 
 
 
California
12
%
 
15
%
 
(3
)%
Arizona
10
%
 
9
%
 
1
 %
Nevada
19
%
 
14
%
 
5
 %
Colorado
9
%
 
10
%
 
(1
)%
Washington
8
%
 
14
%
 
(6
)%
Oregon
8
%
 
14
%
 
(6
)%
Texas
15
%
 
N/A

 
N/M

Overall
11
%
 
13
%
 
(2
)%
Cancellation rates during the 2018 period decreased to 11% from 13% during the 2017 period. Cancellation rates typically are driven by personal factors affecting buyers and may not be indicative of any overarching trends affecting regions.
 
Six Months Ended June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
%
Average Number of Sales Locations
 
 
 
 
 
 
 
California
24

 
24

 

 
 %
Arizona
6

 
8

 
(2
)
 
(25
)%
Nevada
13

 
12

 
1

 
8
 %
Colorado
15

 
13

 
2

 
15
 %
Washington
9

 
9

 

 
 %
Oregon
14

 
19

 
(5
)
 
(26
)%
Texas
13

 
N/A

 
N/M

 
N/M

Total
94

 
85

 
9

 
11
 %
The average number of sales locations for the Company increased to 94 locations for the six months ended June 30, 2018 compared to 85 for the six months ended June 30, 2017, driven by the 34 communities added in conjunction with the acquisition of RSI Communities. During the period, the Company opened 18 communities, while closing out 19 in the legacy operating segments.
 
Six Months Ended June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Quarterly Absorption Rates
 
 
 
 
 
California
12.9
 
11.4
 
1.5
Arizona
18.8
 
17.3
 
1.5
Nevada
8.6
 
7.1
 
1.5
Colorado
10.1
 
5.7
 
4.4
Washington
17.5
 
17.6
 
(0.1)
Oregon
14.6
 
11.2
 
3.4
Texas
10.7
 
N/A
 
N/M
Overall
12.6
 
11.1
 
1.5
The Company's consolidated quarterly absorption rate, representing the number of net new home orders divided by average sales locations for the period, increased for the six months ended June 30, 2018 to 12.6 sales per project from 11.1 in

44



the 2017 period. The Colorado segment has experienced increased absorption due to product offerings at price points below the local median home price.
 
Six Months Ended June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
%
Number of Homes Closed
 
 
 
 
 
 
 
California
478

 
337

 
141

 
42
 %
Arizona
228

 
275

 
(47
)
 
(17
)%
Nevada
165

 
101

 
64

 
63
 %
Colorado
238

 
96

 
142

 
148
 %
Washington
232

 
176

 
56

 
32
 %
Oregon
244

 
345

 
(101
)
 
(29
)%
Texas
237

 
N/A

 
N/M

 
N/M

Total
1,822

 
1,330

 
492

 
37
 %

During the six months ended June 30, 2018, the number of homes closed increased 37% to 1,822 from 1,330 in the 2017 period. The increase was primarily attributable to higher backlog conversion in California and higher absorption in Colorado, in addition to the new home deliveries resulting from the acquisition of RSI Communities.
 
Six Months Ended June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
%
 
(dollars in thousands)
Home Sales Revenue
 
 
 
 
 
 
 
California
$
309,265

 
$
231,258

 
$
78,007

 
34
 %
Arizona
70,803

 
79,088

 
(8,285
)
 
(10
)%
Nevada
95,389

 
60,482

 
34,907

 
58
 %
Colorado
102,500

 
52,338

 
50,162

 
96
 %
Washington
139,138

 
113,735

 
25,403

 
22
 %
Oregon
113,074

 
144,586

 
(31,512
)
 
(22
)%
Texas
60,648

 
N/A

 
N/M

 
N/M

Total
$
890,817

 
$
681,487

 
$
209,330

 
31
 %
The 31% increase in homebuilding revenue is driven by the 37% increase in homes closed discussed above, slightly offset by the 5% decrease in the average sales price of homes closed between the 2018 and 2017 periods, which is primarily driven by product and geographical mix, and was impacted by the lower price point from the new Texas operating segment, which is below the Company average. 
 
Six Months Ended June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
%
Average Sales Price of Homes Closed
 
 
 
 
 
 
 
California
$
647,000

 
$
686,200

 
$
(39,200
)
 
(6
)%
Arizona
310,500

 
287,600

 
22,900

 
8
 %
Nevada
578,100

 
598,800

 
(20,700
)
 
(3
)%
Colorado
430,700

 
545,200

 
(114,500
)
 
(21
)%
Washington
599,700

 
646,200

 
(46,500
)
 
(7
)%
Oregon
463,400

 
419,100

 
44,300

 
11
 %
Texas
255,900

 
N/A

 
N/M

 
N/M

Company Average
$
488,900

 
$
512,400

 
$
(23,500
)
 
(5
)%


45



The average sales price of homes closed during the 2018 period decreased 5% primarily due to product and geographical mix, and was impacted by the lower price point from the new Texas operating segment.
Construction Services Revenue
Construction services revenue was $2.0 million for the six months ended June 30, 2018, which was attributable to one project in Washington.
Gross Margin
Homebuilding gross margins increased to 17.7% for the six months ended June 30, 2018 from 16.1% in the 2017 period, primarily driven by product and geographic mix for home deliveries, as well as new projects with closings above the previous Company averages. In addition, the increase is partially due to the Company's adoption of ASC 606, which resulted in the reclass of the amortization of capitalized costs associated with model homes and sales offices to Sales and marketing expense, previously recorded in Cost of sales - homes, as described in more detail in the notes to the financial statements.
For the comparison of the six months ended June 30, 2018 and the six months ended June 30, 2017, adjusted homebuilding gross margin percentage, which excludes previously capitalized interest included in cost of sales as well as the effect of adjustments recorded in relation to purchase accounting, was 23.0% for the 2018 period compared to 20.9% for the 2017 period. The increase was primarily a result of the increase in homebuilding gross margins described above coupled with the increase in the impact of interest in cost of sales.
Adjusted homebuilding gross margin is a non-GAAP financial measure. The Company believes this information is meaningful as it isolates the impact that interest and purchase accounting have on homebuilding gross margin and permits investors to make better comparisons with the Company's competitors, who also break out and adjust gross margins in a similar fashion. For comparative purposes, purchase accounting is the net adjustment in basis related to the RSI Acquisition, specifically recorded to the California and Texas operating divisions. In the comparative presentation below, purchase accounting amounts related to previous acquisitions have been excluded from both periods. See table set forth below reconciling this non-GAAP measure to homebuilding gross margin.
 
Six Months Ended June 30,
 
2018
 
2017
 
(dollars in thousands)
Home sales revenue
$
890,817

 
$
681,487

Cost of home sales
(732,880
)
 
(571,512
)
Homebuilding gross margin
157,937

 
109,975

Homebuilding gross margin percentage
17.7
%
 
16.1
%
Add: Interest in cost of sales
41,133

 
32,297

Add: Purchase accounting adjustments
6,120

 

Adjusted homebuilding gross margin
$
205,190

 
$
142,272

Adjusted homebuilding gross margin percentage
23.0
%
 
20.9
%
Sales and Marketing, General and Administrative
 
Six Months Ended June 30,
 
As a Percentage of Home Sales Revenue
 
2018
 
2017
 
2018
 
2017
 
(dollars in thousands)
 
 
 
 
Sales and Marketing
$
51,541

 
$
35,989

 
5.7
%
 
5.3
%
General and Administrative
53,028

 
38,496

 
6.0
%
 
5.6
%
Total Sales and Marketing & General and Administrative
$
104,569

 
$
74,485

 
11.7
%
 
10.9
%
Sales and marketing expense as a percentage of home sales revenue increased to 5.7% in the 2018 period compared to 5.3% in the 2017 period, primarily due to the adoption of ASC 606, which resulted in the reclass of the amortization of certain capitalized costs associated with model homes and sales offices to Sales and marketing expense, previously recorded in Cost of

46



sales - homes, as described in more detail in the notes to the financial statements. General and administrative expense increased to 6.0% in the 2018 period compared to 5.6% in the 2017 period due to an increased headcount as a result of the RSI acquisition.
Transaction Expenses
Transaction expenses relate entirely to one-time, non-recurring costs incurred in relation to the acquisition of RSI Communities on March 9, 2018.
Equity in Income of Unconsolidated Joint Ventures
Equity in income of unconsolidated joint ventures remained relatively consistent at $1.5 million for the six months ended June 30, 2018 and $1.5 million during the comparable 2017 period.
Other Items
Interest activity for the six months ended June 30, 2018 and June 30, 2017 is as follows (in thousands): 
 
Six Months Ended June 30,
 
2018
 
2017
Interest incurred
$
42,066

 
$
38,246

Less: Interest capitalized
42,066

 
38,246

Interest expense, net of amounts capitalized
$

 
$

Cash paid for interest
$
33,101

 
$
27,158

The increase in cash paid for interest for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 was due to timing of payments on interest for the Company's Senior Notes. The Company capitalized all of the interest it incurred during both periods presented due to its qualifying assets exceeding its outstanding debt.
During the six months ended June 30, 2018 and 2017, the Company had three land parcel sales that resulted in a negligible loss and one land parcel sale to a third party that did not result in any gain or loss, respectively.
Provision for Income Taxes
During the six months ended June 30, 2018, the Company recorded a provision for income taxes of $10.6 million, for an effective tax rate of 21.0%. During the six months ended June 30, 2017, the Company recorded a provision for income taxes of $3.6 million for an effective tax rate of 24.6%.

Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests increased to $9.0 million during the 2018 period, compared to $2.0 million during the 2017 period.
Net Income Available to Common Stockholders
As a result of the foregoing factors, net income available to common stockholders was $30.8 million for the six months ended June 30, 2018, compared to $9.0 million for the six months ended June 30, 2017.


47



Financial Condition and Liquidity
The U.S. housing market has continued to improve from the cyclical low points of the early years of the last real estate cycle. Strong housing markets have been associated with a healthy domestic economy and positive demographic trends, including employment and population growth. The Company has experienced a strong selling season, with orders up 26%, demonstrating strong growth over 2017, against a backdrop of tight labor markets, fluctuating cycle times, weather challenges, and geo-political changes. Although the economy overall has seen an increase in interest rates, homebuyer demand remains strong against relatively limited supply in all of our markets. As a result, the Company's absorption rates for the six months ended June 30, 2018 increased when compared to the 2017 period.
The Company benefits from a sizable and well-located lot supply, and as of June 30, 2018, the Company owned 19,214 lots, all of which are entitled, and had options to purchase an additional 10,292 lots. The Company’s lot supply reflects its balanced approach to land investment. The Company has a diverse mix of finished lots available for near-term homebuilding operations and longer-term strategic land positions to support future growth. The Company believes that its current inventory of owned and controlled lots is sufficient to supply the vast majority of its projected future home closings for the next several years. Consistent with the entire homebuilding industry, during 2017 and into 2018, the Company experienced increased cycle times and cost increases in a number of its operating segments due to weather delays and availability of qualified trades. The Company continues to implement new strategies to temper the impact of these challenges in an effort to manage cycle times and deliveries.
Since our initial public offering, which raised approximately $163.7 million of net proceeds, the Company has access to the public equity and debt markets, which it has utilized as a significant source of financing for investing in land in our existing markets or financing expansion into new markets, such as the Company’s acquisition of RSI Communities during 2018 and Polygon Northwest Homes during 2014.
The Company provides for its ongoing cash requirements with the proceeds from capital markets transactions, as well as from internally generated funds from the sales of homes and/or land sales. During the six months ended June 30, 2018, the Company delivered 1,822 homes, and recognized home sales revenue of $890.8 million. During the six months ended June 30, 2018, the Company used cash in operations of $130.0 million, which included investment in land acquisitions of $300.5 million, for net cash generated by operations of $170.5 million, net of investment in land acquisitions. In addition, the Company has the option to use additional outside borrowing, form new joint ventures with partners that could provide a substantial portion of the capital required for certain projects, buy land via lot options or land banking arrangements, and engage in future transactions in the public equity and debt markets. The Company has financed, and may in the future finance, certain projects and land acquisitions with construction loans secured by real estate inventories, seller-provided financing, land banking transactions, and capital markets transactions. The Company may also draw on its revolving line of credit to fund land acquisitions, as discussed below. We believe we are well-positioned with a strong balance sheet and sufficient liquidity for supporting our ongoing operations and growth initiatives.

Acquisition of RSI Communities
On March 9, 2018, the Company acquired the residential homebuilding operations of RSI Communities for an aggregate cash purchase price of $460.0 million, plus an additional approximately $15.2 million at closing pursuant to initial working capital adjustments, a portion of which remains subject to final adjustment pursuant to the terms of the Purchase Agreement. The Company financed the RSI Acquisition with a combination of proceeds from its issuance of $350 million in aggregate principal amount of 6.00% senior notes due 2023 and cash on hand including approximately $194.3 million of aggregate proceeds from a land banking arrangement with respect to land parcels located in California and Texas, including parcels acquired in the RSI Acquisition.

5 3/4% Senior Notes Due 2019
On March 31, 2014, California Lyon completed its private placement with registration rights of 5.75% Senior Notes due 2019 (the "5.75% Notes"), in an aggregate principal amount of $150 million. The 5.75% Notes were issued at 100% of their aggregate principal amount. In August 2014, we exchanged 100% of the initial 5.75% Notes for notes that are freely transferable and registered under the Securities Act of 1933, as amended (the “Securities Act”).
During the six months ended June 30, 2018, Parent, through California Lyon, used the net proceeds from the offering of 6.00% Senior Notes due 2023, as further described below, (i) together with cash generated from certain land banking

48



arrangements, and cash on hand, to finance the RSI Acquisition and to pay related fees and expenses and (ii) to repay all of California Lyon's $150 million in aggregate principal amount of 5.75% Notes such that the 5.75% Notes were satisfied and discharged prior to June 30, 2018.

8 1/2% Senior Notes Due 2020
During the six months ended June 30, 2017, Parent, through California Lyon, used the net proceeds from its private placement with registration rights of 5.875% Senior Notes due 2025, as further described below, to purchase $395.6 million of the outstanding aggregate principal amount of its 8.5% Notes, pursuant to a cash tender offer and consent solicitation. Subsequently, the Company used the remaining proceeds, together with cash on hand, for the retirement of the remaining outstanding 8.5% Notes, such that the entire aggregate $425 million of previously outstanding 8.5% Notes are retired and extinguished as of December 31, 2017. The Company incurred certain costs related to the early extinguishment of debt of the 8.5% Notes during the six months ended June 30, 2017 in an amount of $21.8 million, which is included in the Consolidated Statement of Operations as Loss on extinguishment of debt.

7 % Senior Notes due 2022
On August 11, 2014, WLH PNW Finance Corp. (“Escrow Issuer”), completed its offering of 7.00% Senior Notes due 2022 (the “initial 7.00% Notes”), in an aggregate principal amount of $300 million. The initial 7.00% Notes were issued at 100% of their aggregate principal amount. On August 12, 2014, in connection with the consummation of the acquisition of Polygon Northwest Homes, Escrow Issuer merged with and into California Lyon, and California Lyon assumed the obligations of the Escrow Issuer under the initial 7.00% Notes and the related indenture by operation of law (the “Escrow Merger”). Following the Escrow Merger, California Lyon is the obligor under the initial 7.00% Notes. In January 2015, we exchanged 100% of the initial 7.00% Notes for notes that are freely transferable and registered under the Securities Act.
On September 15, 2015, California Lyon completed its private placement with registration rights of an additional $50.0 million in aggregate principal amount of its 7.00% Senior Notes due 2022 (the “additional 7.00% Notes”, and together with the initial 7.00% Notes, the "7.00% Notes") at an issue price of 102.0% of their principal amount, plus accrued interest from August 15, 2015, resulting in net proceeds of approximately $50.5 million. In January 2016, we exchanged 100% of the additional 7.00% Notes for notes that are freely transferable and registered under the Securities Act.
As of June 30, 2018, the outstanding amount of the 7.00% Notes was $350 million, excluding unamortized premium of $0.7 million and deferred loan costs of $3.5 million. The 7.00% Notes bear interest at a rate of 7.00% per annum, payable semiannually in arrears on February 15 and August 15, and mature on August 15, 2022. The 7.00% Notes are unconditionally guaranteed on a joint and several unsecured basis by Parent and certain of its existing and future restricted subsidiaries. The 7.00% Notes and the related guarantees are California Lyon’s and the guarantors’ unsecured senior obligations and rank equally in right of payment with all of California Lyon’s and the guarantors’ existing and future unsecured senior debt, including California Lyon’s $350 million in aggregate principal amount of 6.00% Senior Notes due 2023 and $450 million in aggregate principal amount of 5.875% Senior Notes due 2025, each as described below. The 7.00% Notes rank senior in right of payment to all of California Lyon’s and the guarantors’ future subordinated debt. The 7.00% Notes and the guarantees are and will be effectively junior to California Lyon’s and the guarantors’ existing and future secured debt to the extent of the value of the collateral securing such debt.

6% Senior Notes Due 2023
On March 9, 2018, California Lyon completed its private placement with registration rights of 6.00% Senior Notes due 2023 (the "6.00% Notes"), in an aggregate principal amount of $350 million. The 6.00% Notes were issued at 100% of their aggregate principal amount. Parent, through California Lyon, used the net proceeds from the 6.00% Notes offering to (i) together with cash generated from certain land banking arrangements, and cash on hand, to finance the RSI Acquisition and to pay related fees and expenses and (ii) to repay all of California Lyon's $150 million of the outstanding aggregate principal amount of the 5.75% Notes.
As of June 30, 2018, the outstanding principal amount of the 6.00% Notes was $350 million, excluding deferred loan costs of $6.6 million. The 6.00% Notes bear interest at a rate of 6.00% per annum, payable semiannually in arrears on March 1 and September 1, and mature on September 1, 2023. The 6.00% Notes are unconditionally guaranteed on a joint and several unsecured basis by Parent and certain of its existing and future restricted subsidiaries. The 6.00% Notes and the related guarantees are California Lyon’s and the guarantors’ unsecured senior obligations and rank equally in right of payment with all of California Lyon’s and the guarantors’ existing and future unsecured senior debt, including California Lyon’s $350 million in aggregate principal amount of 7.00% Senior Notes due 2022, as described above and $450 million in aggregate principal

49



amount of 5.875% Senior Notes due 2025, as described below. The 6.00% Notes rank senior in right of payment to all of California Lyon’s and the guarantors’ future subordinated debt. The 6.00% Notes and the guarantees are and will be effectively junior to California Lyon’s and the guarantors’ existing and future secured debt to the extent of the value of the collateral securing such debt.

5 7/8% Senior Notes Due 2025
On January 31, 2017, California Lyon completed its private placement with registration rights of 5.875% Senior Notes due 2025 (the "5.875% Notes"), in an aggregate principal amount of $450 million. The 5.875% Notes were issued at 99.215% of their aggregate principal amount. Parent, through California Lyon, used the net proceeds from the 5.875% Notes offering to purchase the outstanding aggregate principal amount of the 8.5% Notes such that the entire aggregate $425 million of previously outstanding 8.5% Notes are retired and extinguished as of June 30, 2018. In May 2017, the Company exchanged 100% of the 5.875% Notes for notes that are freely transferable and registered under the Securities Act.
As of June 30, 2018, the outstanding principal amount of the 5.875% Notes was $450 million, excluding unamortized discount of $3.0 million and deferred loan costs of $6.7 million. The 5.875% Notes bear interest at a rate of 5.875% per annum, payable semiannually in arrears on January 31 and July 31, and mature on January 31, 2025. The 5.875% Notes are unconditionally guaranteed on a joint and several unsecured basis by Parent and certain of its existing and future restricted subsidiaries. The 5.875% Notes and the related guarantees are California Lyon’s and the guarantors’ unsecured senior obligations and rank equally in right of payment with all of California Lyon’s and the guarantors’ existing and future unsecured senior debt, including California Lyon’s $350 million in aggregate principal amount of 7.00% Senior Notes due 2022 and $350 million in aggregate principal amount of 6.00% Senior Notes due 2023, each as described above. The 5.875% Notes rank senior in right of payment to all of California Lyon’s and the guarantors’ future subordinated debt. The 5.875% Notes and the guarantees are and will be effectively junior to California Lyon’s and the guarantors’ existing and future secured debt to the extent of the value of the collateral securing such debt.

Senior Notes Covenant Compliance
The indentures governing the 7.00% Notes, the 6.00% Notes, and the 5.875% Notes contain covenants that limit the ability of Parent, California Lyon, and their restricted subsidiaries to, among other things: (i) incur or guarantee certain additional indebtedness; (ii) pay dividends, distributions, or repurchase equity or make payments in respect of subordinated indebtedness; (iii) make certain investments; (iv) sell assets; (v) incur liens; (vi) enter into agreements restricting the ability of the Company’s restricted subsidiaries to pay dividends or transfer assets; (vii) enter into transactions with affiliates; (viii) create unrestricted subsidiaries; and (viii) consolidate, merge or sell all or substantially all of its assets. These covenants are subject to a number of important exceptions and qualifications as described in the Indenture. The Company was in compliance with all such covenants as of June 30, 2018.

Revolving Credit Facility
On May 21, 2018, California Lyon and Parent entered into a new credit agreement providing for an unsecured revolving credit facility of up to $325.0 million (the “New Facility”) with the lenders party thereto, which New Facility replaces the Company’s previous $170.0 million revolving credit facility, as described below. The New Facility will mature on May 21, 2021, unless terminated earlier pursuant to the terms of the New Facility. The New Facility contains an uncommitted accordion feature under which its aggregate principal amount can be increased to up to $500.0 million under certain circumstances, as well as a sublimit of $50.0 million for letters of credit.
Borrowings under the New Facility, the availability of which is subject to a borrowing base formula, are required to be guaranteed by the Parent and certain of the Parent’s wholly-owned subsidiaries (such subsidiaries, the “Guarantors”), and may be used for general corporate purposes. As of June 30, 2018, the commitment fee on the unused portion of the New Facility accrues at an annual rate of 0.50%. As of June 30, 2018, the Company had $145.0 million outstanding against the New Facility at an effective rate of 5.1%, as well as a letter of credit for $8.4 million. As of December 31, 2017, the Company had a letter of credit for $7.8 million but no outstanding balance against the previous Second Amended Facility.
The New Facility contains certain financial maintenance covenants, including (a) a minimum tangible net worth requirement of $556.4 million (which is subject to increase over time based on subsequent earnings and proceeds from equity offerings, as well as deferred tax assets to the extent included on the Company's financial statements), (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 65% on June 30, 2018, and further decrease to 60% effective as of December 31, 2018, and (c) a covenant requiring us to maintain either (i) an interest coverage ratio

50



(EBITDA to interest incurred, as defined therein) of at least 1.50 to 1.00 or (ii) liquidity (as defined therein) of an amount not less than the greater of our consolidated interest incurred during the trailing 12 months and $50.0 million. Our compliance with these financial covenants is measured by calculations and metrics that are specifically defined or described by the terms of the New Facility and can differ in certain respects from comparable GAAP or other commonly used terms. The New Facility also contains customary events of default, subject to cure periods in certain circumstances, including: nonpayment of principal, interest and fees or other amounts; violation of covenants; inaccuracy of representations and warranties; cross default to certain other indebtedness; unpaid judgments; and certain bankruptcy and other insolvency events. The occurrence of any event of default could result in the termination of the commitments under the New Facility and permit the Lenders to accelerate payment on outstanding borrowings under the New Facility and require cash collateralization of outstanding letters of credit. If a change of control (as defined in the New Facility) occurs, the Lenders may terminate the commitments under the New Facility and require that the Borrower repay outstanding borrowings under the New Facility and cash collateralize outstanding letters of credit. Interest rates on borrowings generally will be based on either LIBOR or a base rate, plus the applicable spread. The Company was in compliance with all covenants under the New Facility as of June 30, 2018. The following table summarizes these covenants pursuant to the New Facility, and our compliance with such covenants as of June 30, 2018:
 
 
Covenant Requirements at
 
Actual at
Financial Covenant
 
June 30, 2018
 
June 30, 2018
Minimum Tangible Net Worth
 
$
606.6
 million
 
$
866.4
 million
Maximum Leverage Ratio
 
65.0
%
 
61.8
%
Interest Coverage Ratio; or (1)
 
1.5

 
3.5

   Minimum Liquidity (1)
 
$
77.5
 million
 
$
220.8
 million

(1)    We are required to meet either the Interest Coverage Ratio or Minimum Liquidity, but not both.
Although the Company does not believe it is likely to breach any of the covenants listed above, including the maximum leverage ratio covenant, based on its current expectations and assumptions, there are certain steps that the Company could take to decrease the likelihood of any breach in the event it was determined that a breach was reasonably likely. The Company remains focused on continuing to drive top line revenue growth which it believes will improve cash flow and generate earnings. In addition, there are certain discretionary levers that the Company has the ability to utilize to the extent it is determined that near-term steps are needed to manage to covenant requirements. For example, land acquisition and development is a strategic investment by the Company to support our future growth plans. While the Company intends to continue to acquire land that it believes is accretive to the Company, the Company's currently owned and controlled land position enables it to be selective and nimble in its future acquisition strategy. The Company also has the option to form new joint ventures with partners that could provide a substantial portion of the capital required for certain projects, purchase land through lot options or land banking arrangements, as well as utilizing such financing structures as a means to generate incremental cash flow, or adjust the timing of housing starts. In addition, during the six months ended June 30, 2018, the Company paid approximately $300.5 million for land and land developments. Such spending related to land owned is a discretionary component that the Company can temper as needed to reduce cash outflow, and it believes it can do so without a significant impact on near-term operating results.
The New Facility contains customary events of default, subject to cure periods in certain circumstances, including: nonpayment of principal, interest and fees or other amounts; violation of covenants, including those financial covenants identified above; inaccuracy of representations and warranties; cross default to certain other indebtedness; unpaid judgments; and certain bankruptcy and other insolvency events.
The occurrence of any event of default could result in the termination of the commitments under the New Facility and permit the lenders to accelerate payment on outstanding borrowings under the New Facility and require cash collateralization of outstanding letters of credit, if we are unable to amend the New Facility, secure a waiver of the default from the lenders or otherwise cure the default. Further, acceleration of the New Facility borrowings may result in the acceleration of other debt to which a cross-acceleration or cross-default provision applies, including but not limited to our senior notes as described above to the extent the acceleration is above certain threshold amounts, and the triggering default is not cured or waived or any acceleration rescinded, as well as certain notes payable.
In addition, if a change in control (as defined in the New Facility) occurs, the lenders may terminate the commitments under the New Facility and require that the Company repay outstanding borrowings under the New Facility and cash collateralize outstanding letters of credit.
The Company believes it has access to alternate sources of funding to pay off resulting obligations or replace funding under the New Facility should there be a likelihood of, or anticipated, breach of any covenants, including cash generated from

51



operations and opportunistic land sales. In addition, the Company has capacity under the restrictive covenants of its senior notes indentures to incur additional indebtedness which it can do through access to the debt capital markets, and the Company believes it can also raise equity in the capital markets.

Seller Financing
During the six months ended June 30, 2018, the Company paid in full prior to maturity, along with all accrued interest to date, a note payable outstanding related to a land acquisition for which seller financing was provided. The note bore interest at a rate of 7% per annum and was secured by the underlying land.

Notes Payable
  
    The Company and certain of its consolidated joint ventures have entered into notes payable agreements. The issuance date, facility size, maturity date and interest rate of the joint ventures notes payable are listed in the table below as of June 30, 2018 (in millions):
Issuance Date
 
Facility Size
 
Outstanding
 
Maturity
 
Current Rate
 
May, 2018
 
$
70.0

 
$
68.3

 
May, 2021
 
4.98
%
(5)
May, 2018
 
13.3

 
3.7

 
June, 2020
 
4.99
%
(6)
July, 2017
 
66.2

 
45.6

 
February, 2021
 
5.13
%
(5)
January, 2016
 
35.0

 
26.5

 
February, 2019
 
5.34
%
(2)
November, 2015
 
42.5

 
16.2

 
May, 2019
 
6.00
%
(1)
November, 2014
 
1.3

 
0.1

(4)
August, 2018
 
5.50
%
(3)
March, 2014
 
4.0

 
1.2

(4)
October, 2018
 
5.07
%
(1)
 
 
$
232.3

 
$
161.6

 
 
 
 
 
(1) Loan bears interest at the Company's option of either LIBOR +3.0% or the prime rate +1.0%.
(2) Loan bears interest at LIBOR +3.25%.
(3) Loan bears interest at the prime rate +0.5%.
(4) The Company anticipates paying the borrowings in full upon the maturity date from proceeds from homes closed in the respective project.
(5) Loan bears interest at the greatest of the prime rate, federal funds effective rate +1.0%, or LIBOR +1.0%.
(6) Loan bears interest at LIBOR +2.90%.
In addition to the above, the Company had $1.5 million of construction notes payable outstanding related to projects that are wholly-owned by the Company.
The notes payable contain certain financial maintenance covenants. The Company was in compliance with all such covenants as of June 30, 2018.

Net Debt to Total Capital
The Company’s ratio of net debt to total capital (net of cash) was 58.6% and 49.6% as of June 30, 2018 and December 31, 2017, respectively. The ratio of net debt to total capital (net of cash) is a non-GAAP financial measure, which is calculated by dividing notes payable and Senior Notes, net of cash and cash equivalents, by net book capital (notes payable and Senior Notes, net of cash and cash equivalents, plus total equity). The Company believes this calculation is a relevant and useful financial measure to investors in understanding the leverage employed in its operations, and may be helpful in comparing the Company with other companies in the homebuilding industry to the extent they provide similar information. See table set forth below reconciling this non-GAAP measure to the ratio of debt to total capital.

52



 
June 30, 2018
 
December 31, 2017
 
(dollars in thousands)
Notes payable and Senior Notes
$
1,438,784

 
$
1,030,184

Total equity
980,955

 
860,630

Total capital
$
2,419,739

 
$
1,890,814

Ratio of debt to total capital
59.5
%
 
54.5
%
Notes payable and Senior Notes
$
1,438,784

 
$
1,030,184

Less: Cash and cash equivalents
(49,171
)
 
(182,710
)
Net debt
1,389,613

 
847,474

Total equity
980,955

 
860,630

Total capital (net of cash)
$
2,370,568

 
$
1,708,104

Ratio of net debt to total capital (net of cash)
58.6
%
 
49.6
%
Land Banking Arrangements
As a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Company’s available cash or other corporate financing sources and limiting the Company’s risk, the Company transfers its right in such purchase agreements to entities owned by third parties, or land banking arrangements. These entities use equity contributions and/or incur debt to finance the acquisition and development of the land being purchased. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit of 15% to 25% of the total purchase price. The Company is under no obligation to purchase the balance of the lots, but would forfeit remaining deposits and could be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. These land banking arrangements help the Company manage the financial and market risk associated with land holdings. The use of these land banking arrangements is dependent on, among other things, the availability of capital to the option provider, general housing market conditions and geographic preferences.
The Company participated in one land banking arrangement during the six months ended June 30, 2018 that was not a variable interest entity in accordance with FASB ASC Topic 810, Consolidation (“ASC 810”), but was consolidated in accordance with FASB ASC Topic 470, Debt (“ASC 470”). Under the provisions of ASC 470, the Company had determined it is economically compelled, based on certain factors, to purchase the land in the land banking arrangement. Therefore, the Company has recorded the remaining purchase price of the land of $247.0 million as of June 30, 2018, which was included in Real estate inventories not owned and Liabilities from inventories not owned in the accompanying balance sheet.
Summary information with respect to the Company’s consolidated land banking arrangements is as follows as of the period presented (dollars in thousands):
 
 
June 30, 2018
Total number of land banking projects consolidated
 
1

Total number of lots
 
3,181

Total purchase price
 
$
316,452

Balance of lots still under option and not purchased:
 
 
Number of lots
 
2,864

Purchase price
 
$
284,165

Forfeited deposits if lots are not purchased
 
$
37,116

Joint Venture Financing
The Company and certain of its subsidiaries are general partners or members in joint ventures involved in the development and sale of residential projects. As described more fully in Critical Accounting Policies—Variable Interest Entities, certain joint ventures have been determined to be variable interest entities in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures have been consolidated with the Company’s financial statements for the periods presented. The financial statements of joint ventures in which the Company is not considered the primary beneficiary are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the Company). Based upon current estimates,

53



substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint ventures.
Cash Flows—Comparison of the Six Months Ended June 30, 2018 to the Six Months Ended June 30, 2017
For the six months ended June 30, 2018 and 2017, the comparison of cash flows is as follows:
Net cash used in operating activities was $130.0 million in the 2018 period compared to $66.8 million in the 2017 period. The change was primarily a result of (i) a net increase in spending on real estate inventories-owned of $198.5 million, net of $194.1 million of cash proceeds from a land banking arrangement, compared to $92.3 million in the 2017 period, partially offset by (ii) an increase in accounts payable of $20.9 million in the 2018 period compared to $4.5 million in the 2017 period due to timing of payments, and (iii) a decrease in accrued expenses of $0.6 million in the 2018 period compared to $13.8 million in the 2017 period.
Net cash used in investing activities was $481.4 million in the 2018 period primarily due to the cash paid for the RSI acquisition of $475.2 million in the 2018 period, for which there is no comparable amount in the 2017 period.
Net cash provided by financing activities increased to $477.8 million in the 2018 period from $57.0 million in the 2017 period. The change was primarily the result of (i) proceeds of $350.0 million from the issuance of the 6% Senior Notes in the 2018 period, for which there is no comparable amount in the 2017 period, (ii) principal payments of the 8.5% Senior Notes of $425.0 million in the 2017 period for which there is no comparable amount in the 2018 period, (iii) net proceeds from borrowings of $145.0 million against the revolving line of credit in the 2018 period, versus net borrowings of $36.0 million in the 2017 period, and (iv) net noncontrolling interest contributions of $86.1 million in the 2018 period compared to $37.6 million in the 2017 period, partially offset by (v) proceeds from the issuance of the 5.875% Senior Notes of $446.5 million in the 2017 period, for which there is no comparable amount in the 2018 period and (vi) payments to repurchase common stock of $6.1 million in the 2018 period, for which there is no comparable amount in the 2017 period.
Based on capital market access and expected sales volume, the Company believes it has sufficient cash and sources of financing for at least the next twelve months.
Contractual Obligations and Off-Balance Sheet Arrangements
The Company enters into certain off-balance sheet arrangements including joint venture financing, option agreements, land banking arrangements and variable interests in unconsolidated entities. These arrangements are more fully described above and in Notes 3 and 13 of “Notes to Condensed Consolidated Financial Statements.” In addition, the Company is party to certain contractual obligations, including land purchases and project commitments, which are detailed in Note 13 of “Notes to Condensed Consolidated Financial Statements.”
Inflation
The Company’s revenues and profitability may be affected by increased inflation rates and other general economic conditions. In periods of high inflation, demand for the Company’s homes may be reduced by increases in mortgage interest rates. Further, the Company’s profits will be affected by increases in the costs of land, construction, labor and administrative expenses. The Company’s ability to raise prices at such times will depend upon demand and other competitive factors.
Description of Projects and Communities Under Development
The Company’s homebuilding projects usually take two to five years to develop. The following table presents project information relating to each of the Company’s homebuilding operating segments as of June 30, 2018, which includes lots owned as of June 30, 2018, lots consolidated in accordance with certain accounting principles as of June 30, 2018, homes either closed or in backlog as of or for the period ended June 30, 2018, parcels of undeveloped land held for future sale, and lots controlled as of June 30, 2018. The following table includes certain information that is forward-looking or predictive in nature and is based on expectations and projections about future events. Such information is subject to a number of risks and uncertainties, and actual results may differ materially from those expressed or forecast in the table below. In addition, we undertake no obligation to update or revise the information in the table below to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to projections over time. See "CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS" included in this Quarterly Report on Form 10-Q.

54



 
 
Estimated
Number of
Homes at
Completion
(1)
 
Cumulative
Homes
Closed as
of June 30, 2018
(2)
 
Backlog
at
June 30, 2018
(3) (4)
 
 Lots Owned or Controlled as of June 30, 2018 (5)
 
Homes
Closed
for the
Six Months
Ended
June 30, 2018
 
Estimated Sales Price Range
(6)
California
 
7,491


1,548


457


5,943


478

 
$ 298,000 - 2,991,000
Arizona
 
4,874

 
1,186

 
159

 
4,644

 
228

 
$ 168,990 - 468,990
Nevada
 
2,458

 
882

 
145

 
2,825

 
165

 
$ 181,500 - 1,552,500
Colorado
 
3,130

 
803

 
238

 
2,327

 
238

 
$ 269,000 - 584,000
Washington
 
3,412

 
751

 
174

 
2,661

 
232

 
$ 284,990 - 1,329,990
Oregon
 
5,218

 
1,139

 
236

 
4,079

 
244

 
$ 194,990 - 779,990
Texas
 
7,082

 
237

 
239

 
7,027

 
237

 
$ 190,990 - 452,990
GRAND TOTALS
 
33,665

 
6,546

 
1,648

 
29,506

 
1,822

 
 
 
(1)
The estimated number of homes to be built at completion is approximate and includes home sites in our backlog. Such estimated amounts are subject to change based on, among other things, future site planning, as well as zoning and permit changes, and there can be no assurance that the Company will build these homes. Further, certain projects may include lots that the Company controls, and that are also reflected in "Lots Owned or Controlled as of June 30, 2018".
(2)
“Cumulative Homes Closed” represents homes closed since the project opened, and may include prior years, in addition to the homes closed during the current year presented.
(3)
Backlog consists of homes sold under sales contracts that have not yet closed, and there can be no assurance that closings of sold homes will occur.
(4)
Of the total homes subject to pending sales contracts as of June 30, 2018, 1,186 represent homes that are completed or under construction.
(5)
Lots owned or controlled as of June 30, 2018 include lots in backlog at June 30, 2018 and projects with lots owned as of June 30, 2018 that are expected to open for sale and have an estimated year of first delivery of 2019 or later, as well as lots controlled as of June 30, 2018, and parcels of undeveloped land held for future sale. Certain lots controlled are under land banking arrangements which may become owned and produce deliveries during 2018. Actual homes at completion may change prior to the marketing and sales of homes in these projects and the sales price ranges for these projects are to be determined and will be based on current market conditions and other factors upon the commencement of active selling. There can be no assurance that the Company will acquire any of the controlled lots reflected in these amounts.
(6)
Estimated sales price range reflects the most recent pricing updates of the base price only and excludes any lot premium, buyer incentive and buyer selected options, which vary from project to project. Sales prices reflect current pricing estimates and might not be indicative of past or future pricing. Further, any potential benefit to be gained from an increase in sales price ranges as compared to previously estimated amounts may be offset by increases in costs, profit participation, and other factors.
Income Taxes
See Note 10 of “Notes to Condensed Consolidated Financial Statements” for a description of the Company’s income taxes.
Critical Accounting Policies
The Company’s financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and costs and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those which impact its most critical accounting policies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, the Company’s most critical accounting policies are real estate inventories and cost of sales; impairment of real estate inventories; variable interest entities; and business combinations. Management believes that there have been no significant changes to these policies during the six months ended June 30, 2018, as compared to those

55



disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Annual Report on Form 10-K for the year ended December 31, 2017.

56



Item 3.
Quantitative and Qualitative Disclosures About Market Risk
The Company’s exposure to market risk for changes in interest rates relates to the Company’s floating rate debt with a total outstanding balance at June 30, 2018 of $306.6 million where the interest rate is variable based upon certain bank reference or prime rates. The prime rate during the six months ended June 30, 2018 ranged between 4.50% and 5.00%. Based upon the amount of variable rate debt held by the Company, and holding the variable rate debt balance constant, each 1% increase in interest rates would increase the amount of interest expense incurred by the Company by approximately $3.1 million.
The following table presents principal cash flows by scheduled maturity, interest rates and the estimated fair value of our long-term fixed rate debt obligations as of June 30, 2018 (dollars in thousands):
 
 
Years ending December 31,
 
Thereafter
 
Total
 
Fair Value at
June 30, 2018
 
2018
 
2019
 
2020
 
2021
 
2022
 
Fixed rate debt
$
1,510

 
$

 
$

 
$

 
$
350,000

 
$
800,000

 
$
1,151,510

 
$
1,124,090

Interest rate

 

 

 

 
7.0
%
 
5.875 - 6.0%

 
 
 
 
The Company does not utilize swaps, forward or option contracts on interest rates, foreign currencies or commodities, or other types of derivative financial instruments as of or during the six months ended June 30, 2018. The Company does not enter into or hold derivatives for trading or speculative purposes.

57



Item 4.
Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined under Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and, in reaching a reasonable level of assurance, our management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures.
Evaluation of Disclosure Controls and Procedures. We carried out an evaluation as of June 30, 2018, under the supervision and with the participation of our management, including our President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based upon their evaluation and subject to the foregoing, our President and Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2018, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting. Our management determined that as of June 30, 2018, there were no changes in our internal control over financial reporting that occurred during the fiscal quarter then ended that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

58



WILLIAM LYON HOMES
PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings
The Company is involved in various legal proceedings, most of which relate to routine litigation and some of which are covered by insurance. These matters are subject to many uncertainties and the outcomes of these matters are not within our control and may not be known for prolonged periods of time. Nevertheless, in the opinion of the Company’s management, the Company does not have any currently pending litigation of which the outcome will have a material adverse effect on the Company’s operations or financial position.
 
Item 1A.
Risk Factors

You should carefully consider the risks described in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2017, as our business, financial condition and results of operations could be adversely affected by any of the risks and uncertainties described therein. There have been no material changes to the risk factors we previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017. Some statements in this Quarterly Report on Form 10-Q, including statements in the risk factors, constitute forward-looking statements. Please refer to the section titled, “CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS” included elsewhere in this Quarterly Report on Form 10-Q.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The table below summarizes the number of shares of our Class A Common Stock that were repurchased during the three month period ended June 30, 2018.
Month Ended
 
Average Price Paid Per Share
 
Total Number of Shares Purchased under the Stock Repurchase Program (1)
 
Approximate Dollar Value of Shares that may yet be Repurchased under the Stock Repurchase Program
April 30, 2018
 
N/A

 

 
$
41,894,418

May 31, 2018
 
N/A

 

 
41,894,418

June 30, 2018
 
$
23.31

 
48,179

 
40,771,343

Total
 
 
 
48,179

 

(1) As announced on February 22, 2017, the Board of Directors of the Company has approved a stock repurchase program, authorizing the repurchase of up to an aggregate of $50 million of the Company's Class A common stock. The program allows the Company to repurchase shares of Class A common stock from time to time for cash in the open market or privately negotiated transactions or other transactions, as market and business conditions warrant and subject to applicable legal requirements. The stock repurchase program does not obligate the Company to repurchase any particular amount of common stock, and it could be modified, suspended or discontinued at any time.

Item 3.
Defaults Upon Senior Securities
None.

59



Item 4.
Mine Safety Disclosure
Not applicable.

Item 5.
Other Information
Not applicable.

60



Item 6.
Exhibits
Exhibit Index


Exhibit
No.
Description
 
 
Credit Agreement, dated May 21, 2018, among William Lyon Homes, Inc., as Borrower, William Lyon Homes, as Parent, each subsidiary of the Borrower party thereto, The Lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed May 25, 2018).
 
 
Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
 
 
Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
 
 
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
 
 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
 
 
101.INS**
XBRL Instance Document.
 
 
101.SCH**
XBRL Taxonomy Extension Schema Document.
 
 
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document.
 
 
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document.

+
Filed herewith
 
 
*
The information in Exhibits 32.1 and 32.2 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act (including this Report), unless the Registrant specifically incorporates the foregoing information into those documents by reference.
**
Pursuant to Rule 406T of Regulation S-T, the XBRL information will not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 and will not be deemed filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, or otherwise subject to liability under those Sections.


61



WILLIAM LYON HOMES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
WILLIAM LYON HOMES,
 
a Delaware corporation
 
 
 
Date: August 3, 2018
By:
/S/    COLIN T. SEVERN        
 
 
Colin T. Severn
 
 
Senior Vice President, Chief Financial Officer
(Principal Accounting Officer and Duly Authorized Signatory)


62



Exhibit Index


Exhibit
No.
Description
 
 
10.1
Credit Agreement, dated May 21, 2018, among William Lyon Homes, Inc., as Borrower, William Lyon Homes, as Parent, each subsidiary of the Borrower party thereto, The Lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed May 25, 2018).
 
 
31.1+
Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
 
 
31.2+
Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
 
 
32.1*
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
 
 
32.2*
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
 
 
101.INS**
XBRL Instance Document.
 
 
101.SCH**
XBRL Taxonomy Extension Schema Document.
 
 
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document.
 
 
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document.

+
Filed herewith
 
 
*
The information in Exhibits 32.1 and 32.2 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act (including this Report), unless the Registrant specifically incorporates the foregoing information into those documents by reference.
**
Pursuant to Rule 406T of Regulation S-T, the XBRL information will not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 and will not be deemed filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, or otherwise subject to liability under those Sections.


63