Acquisition of RSI Communities

On March 9, 2018, the Company completed its acquisition of RSI Communities, a Southern California- and Texas-based homebuilder, and three additional related real estate assets (the “RSI Acquisition”) pursuant to the Purchase and Sale Agreement (the “Purchase Agreement”) dated February 19, 2018 among William Lyon Homes, Inc., a California corporation and wholly-owned subsidiary of Parent ("California Lyon"), RSI Communities, L.L.C, RS Equity Management L.L.C., Class B Sellers of RSI Communities L.L.C., and RS Equity Management L.L.C. Pursuant to the Purchase Agreement, California Lyon acquired, for cash, all of the membership interests of the underlying limited liability companies and three additional related real estate assets (collectively referred to herein as "RSI Communities") and which conducts business as RSI Communities, L.L.C. (“RSI”), 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. 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 division of the Company under the RSI name 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 March 31, 2018, home deliveries and operating revenue from RSI operations were 80 units and $22.7 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:



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 March 31, 2018, the Company had not completed its final estimate of the fair value of the net assets of RSI Communities, due to the RSI Acquisition's close proximity to quarter end. As such, the estimates used as of March 31, 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 $3.1 million in acquisition related costs for the three months ended March 31, 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 months ended March 31, 2018 and March 31, 2017 as if the RSI Acquisition had been completed as of January 1, 2017 (amounts in thousands, except per share data):



	Three months ended March 31, 2018		Three months ended March 31, 2017
Operating revenues	$	401,600	258,854
Net income (loss) available to common stockholders	$	6,419	$	(10,767	)
Income (Loss) per share - basic	$	0.17	$	(0.29	)
Income (Loss) per share - diluted	$	0.16	$	(0.29	)

The unaudited pro forma operating results have been determined after adjusting the unaudited operating results of RSI Communities to reflect the estimated purchase accounting and other acquisition adjustments including interest expense associated with the debt used to fund a portion of the acquisition. 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 RSI Acquisition, the costs to combine the operations of the Company and RSI Communities 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 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.