10-Q 1 wlh-9302018x10q.htm 10-Q Document


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 September 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 October 31, 2018
Common stock, Class A, par value $0.01
32,937,737

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





WILLIAM LYON HOMES
INDEX
 
 
 
Page
No.
 
Item 1.
Financial Statements as of September 30, 2018, and for the three and nine months ended September 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; 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; 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: changes in mortgage and other interest rates; affordability pressures; the Company’s ability to successfully integrate RSI Communities’ homebuilding operations with its existing operations; the availability of skilled subcontractors, labor and homebuilding materials and increased construction cycle times; 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; 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; conditions in the capital, credit and financial markets, including mortgage lending standards and the availability and timing 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)
 
September 30,
2018
 
December 31,
2017
 
(unaudited)
 

ASSETS
 
 
 
Cash and cash equivalents — Note 1
$
50,782

 
$
182,710

Receivables
10,561

 
10,223

Escrow proceeds receivable
370

 
3,319

Real estate inventories — Note 6
 
 
 
Owned
2,437,450

 
1,699,850

Not owned
209,819

 

Investment in unconsolidated joint ventures — Note 4
5,109

 
7,867

Goodwill
118,877

 
66,902

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

 
6,700

Deferred income taxes
48,279

 
47,915

Lease right-of-use assets
15,353

 
14,454

Other assets, net
40,748

 
21,164

Total assets
$
2,944,048

 
$
2,061,104

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
94,904

 
$
58,799

Accrued expenses
125,249

 
111,491

Liabilities from inventories not owned — Note 13
209,819

 

Notes payable — Note 7:
 
 
 
Revolving credit facility
220,000

 

Seller financing

 
589

Construction notes payable
1,426

 

Joint venture notes payable
163,385

 
93,926

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

 
149,362

7% Senior Notes due August 15, 2022 — Note 7
347,273

 
346,740

6% Senior Notes due September 1, 2023 — Note 7
343,568

 

5 7/8% Senior Notes due January 31, 2025 — Note 7
440,597

 
439,567

 
1,946,221

 
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 September 30, 2018 and December 31, 2017

 

Common stock, Class A, par value $0.01 per share; 150,000,000 shares authorized; 34,150,104 and 34,267,510 shares issued, 32,937,737 and 33,135,650 shares outstanding at September 30, 2018 and December 31, 2017, respectively
341

 
344

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

 
48

Additional paid-in capital
445,694

 
454,286

Retained earnings
383,135

 
325,794

Total William Lyon Homes stockholders’ equity
829,218

 
780,472

Noncontrolling interests — Note 3
168,609

 
80,158

Total equity
997,827

 
860,630

Total liabilities and equity
$
2,944,048

 
$
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 
 September 30, 
 2018
 
Three 
 Months 
 Ended 
 September 30, 
 2017
 
Nine 
 Months 
 Ended 
 September 30, 
 2018
 
Nine 
 Months 
 Ended 
 September 30, 
 2017
Operating revenue
 
 
 
 
 
 
 
Home sales — Note 1
$
533,514

 
$
490,304

 
$
1,424,331

 
$
1,171,791

Construction services — Note 1
1,190

 
35

 
3,193

 
94


534,704

 
490,339

 
1,427,524

 
1,171,885

Operating costs
 
 
 
 
 
 
 
Cost of sales — homes
(436,311
)
 
(401,700
)
 
(1,169,191
)
 
(973,212
)
Construction services — Note 1
(1,121
)
 
(35
)
 
(3,063
)
 
(41
)
Sales and marketing
(28,879
)
 
(21,935
)
 
(80,420
)
 
(57,924
)
General and administrative
(30,039
)
 
(22,951
)
 
(83,067
)
 
(61,447
)
Transaction expenses

 

 
(3,907
)
 

Other
(591
)
 
(548
)
 
(1,510
)
 
(1,548
)

(496,941
)
 
(447,169
)
 
(1,341,158
)
 
(1,094,172
)
Operating income
37,763

 
43,170

 
86,366

 
77,713

Equity in income of unconsolidated joint ventures
531

 
1,160

 
1,996

 
2,622

Other income (loss), net
2,510

 
(365
)
 
2,856

 
(12
)
Income before extinguishment of debt
40,804

 
43,965

 
91,218

 
80,323

Loss on extinguishment of debt

 

 

 
(21,828
)
Income before provision for income taxes
40,804

 
43,965

 
91,218

 
58,495

Provision for income taxes — Note 10
(8,990
)
 
(13,905
)
 
(19,580
)
 
(17,480
)
Net income
31,814

 
30,060

 
71,638

 
41,015

Less: Net income attributable to noncontrolling interests
(5,256
)
 
(2,642
)
 
(14,297
)
 
(4,643
)
Net income available to common stockholders
$
26,558

 
$
27,418

 
$
57,341

 
$
36,372

Income per common share:
 
 
 
 
 
 
 
Basic
$
0.70

 
$
0.74

 
$
1.51

 
$
0.98

Diluted
$
0.68

 
$
0.71

 
$
1.45

 
$
0.95

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
37,847,743

 
37,059,483

 
37,931,764

 
37,007,144

Diluted
39,160,894

 
38,583,341

 
39,581,986

 
38,381,292

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

 

 

 
57,341

 
14,297

 
71,638

Cash contributions from members of consolidated entities

 

 

 

 
126,088

 
126,088

Cash distributions to members of consolidated entities

 

 

 

 
(51,934
)
 
(51,934
)
Repurchases of common stock
(497
)
 
(6
)
 
(11,228
)
 

 

 
(11,234
)
Shares remitted to Company to satisfy employee tax obligations
(198
)
 
(2
)
 
(4,952
)
 

 

 
(4,954
)
Stock based compensation expense
577

 
5

 
7,588

 

 

 
7,593

Balance - September 30, 2018
38,967


$
389

 
$
445,694


$
383,135


$
168,609

 
$
997,827

See accompanying notes to condensed consolidated financial statements
 


5



WILLIAM LYON HOMES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited) 
 
Nine 
 Months 
 Ended 
 September 30, 
 2018
 
Nine 
 Months 
 Ended 
 September 30, 
 2017
Operating activities
 
 
 
Net income
$
71,638

 
$
41,015

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

 
 
Depreciation and amortization
5,779

 
1,426

Net change in deferred income taxes
(364
)
 
2,154

Stock based compensation expense
7,593

 
6,260

Equity in earnings of unconsolidated joint ventures
(1,996
)
 
(2,622
)
Distributions from unconsolidated joint ventures
4,896

 
1,840

Loss on extinguishment of debt

 
21,828

Net changes in operating assets and liabilities:

 
 
Receivables
1,271

 
(342
)
Escrow proceeds receivable
2,949

 
(143
)
Real estate inventories
(303,149
)
 
(98,980
)
Other assets
(4,149
)
 
(3,536
)
Accounts payable
26,790

 
9,834

Accrued expenses
3,746

 
(1,724
)
Net cash used in operating activities
(184,996
)
 
(22,990
)
Investing activities

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

Purchases of property and equipment
(7,500
)
 
(2,416
)
Net cash used in investing activities
(482,721
)

(2,416
)
Financing activities

 
 
Proceeds from borrowings on notes payable
151,551

 
105,109

Principal payments on notes payable
(82,971
)
 
(101,400
)
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
407,446

 
275,000

Payments on Revolver
(187,446
)
 
(254,000
)
Principal payments on subordinated amortizing notes

 
(5,606
)
Payment of deferred loan costs
(10,757
)
 
(9,794
)
Shares remitted to, or withheld by the Company for employee tax withholding
(4,954
)
 
(1,450
)
Payments to repurchase common stock
(11,234
)
 
(2,284
)
Noncontrolling interest contributions
126,088

 
58,829

Noncontrolling interest distributions
(51,934
)
 
(39,829
)
Net cash provided by financing activities
535,789

 
26,398

Net (decrease) increase in cash and cash equivalents
(131,928
)
 
992

Cash and cash equivalents — beginning of period
182,710

 
42,612

Cash and cash equivalents — end of period
$
50,782

 
$
43,604

Supplemental disclosures:

 
 
Cash paid during the period for income taxes
$
169

 
$
17,079

Supplemental disclosures of non-cash investing and financing activities:


 
 
Right-of-use assets obtained in exchange for new operating lease liabilities
$
5,640

 
$
5,213

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
$
15,546

 
$

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 September 30, 2018 and December 31, 2017 and revenues and expenses for the three and nine month periods ended September 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 September 30, 2018, the Company had three land parcel sales that resulted in a $1.9 million gain. During the nine months ended September 30, 2018, the Company had six land parcel sales that resulted in a $1.9 million gain. During the three and nine months ended September 30, 2017, the Company had one and two land parcel sales, respectively, that resulted in a negligible loss for both periods then ended.
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 nine months ended September 30, 2018 and 2017, are as follows (in thousands):
 
 
Nine 
 Months 
 Ended 
 September 30, 
 2018
 
Nine 
 Months 
 Ended 
 September 30, 
 2017
Warranty liability, beginning of period
$
13,643

 
$
14,173

Warranty provision during period (1)
7,591

 
7,695

Warranty payments, net of insurance recoveries during period
(9,436
)
 
(9,418
)
Warranty charges related to construction services projects
30

 
120

Warranty liability, end of period
$
11,828

 
$
12,570


(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 nine months ended September 30, 2018 and 2017 are as follows (in thousands):
 
 
Three 
 Months 
 Ended 
 September 30, 
 2018
 
Three 
 Months 
 Ended 
 September 30, 
 2017
 
Nine 
 Months 
 Ended 
 September 30, 
 2018
 
Nine 
 Months 
 Ended 
 September 30, 
 2017
Interest incurred
$
24,725

 
$
18,112

 
$
66,791

 
$
56,359

Less: Interest capitalized
24,725

 
18,112

 
66,791

 
56,359

Interest expense, net of amounts capitalized
$

 
$

 
$

 
$

Cash paid for interest
$
40,578

 
$
28,374

 
$
73,622

 
$
55,532

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 September 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 nine months ended September 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 September 30, 2018, home deliveries from RSI operations were 633 units. In addition, operating revenue and income before provision for income taxes for the same period were $198.5 million and $5.6 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 September 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 September 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 no acquisition related costs for the three months ended September 30, 2018 and $3.9 million in acquisition related costs for the nine months ended September 30, 2018, 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 nine months ended September 30, 2018 and September 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 September 30, 2018
Three Months Ended September 30, 2017
Nine Months Ended September 30, 2018
Nine Months Ended September 30, 2017
Operating revenues
$
534,704

$
526,652

$
1,467,959

$
1,232,343

Net income available to common stockholders
$
26,558

$
28,177

$
57,143

$
35,867

Income per share - basic
$
0.70

$
0.76

$
1.51

$
0.97

Income per share - diluted
$
0.68

$
0.74

$
1.44

$
0.94

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

11



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.
Note 3—Variable Interest Entities and Noncontrolling Interests
As of September 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 September 30, 2018 and December 31, 2017.
As of September 30, 2018, the assets of the consolidated VIEs totaled $461.5 million, of which $13.7 million was cash and cash equivalents and $444.7 million was owned real estate inventories. The liabilities of the consolidated VIEs totaled $217.1 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 September 30, 2018
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2018
 
Nine Months Ended September 30, 2017
Revenues
$
3,975

 
$
5,368

 
$
11,863

 
$
13,830

Cost of sales
(2,974
)
 
(2,781
)
 
(7,901
)
 
(7,936
)
Income of unconsolidated joint ventures
$
1,001

 
$
2,587

 
$
3,962

 
$
5,894


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 nine months ended September 30, 2018, and 2017, the Company recorded income of $0.5 million and $2.0 million and $1.2 million and $2.6 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



 
 
 
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
 
 
Cash
 
$
6,723

 
$
12,802

 
Loans held for sale
 
24,183

 
17,106

 
Accounts receivable
 
815

 
2,791

 
Other assets
 
146

 
128

 
 
Total Assets
 
$
31,867

 
$
32,827

 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
Accounts payable
 
$
457

 
$
779

 
Accrued expenses
 
1,331

 
1,532

 
Credit lines payable
 
22,882

 
18,312

 
Other liabilities
 
543

 
31

 
Members equity
 
6,654

 
12,173

 
 
Total Liabilities and Equity
 
$
31,867

 
$
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 nine months ended September 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 
 September 30, 
 2018
 
Three 
 Months 
 Ended 
 September 30, 
 2017
 
Nine 
 Months 
 Ended 
 September 30, 
 2018
 
Nine 
 Months 
 Ended 
 September 30, 
 2017
Operating revenue:
 
 
 
 
 
 
 
California (1)
$
201,316

 
$
230,960

 
$
510,581

 
$
462,277

Arizona
34,286

 
39,607

 
105,089

 
118,695

Nevada
49,816

 
42,966

 
145,205

 
103,448

Colorado
54,574

 
24,811

 
157,074

 
77,149

Washington (2)
82,177

 
71,788

 
223,318

 
185,523

Oregon
69,430

 
80,207

 
182,504

 
224,793

Texas
43,105

 

 
103,753

 

Total operating revenue
$
534,704

 
$
490,339

 
$
1,427,524

 
$
1,171,885

 
 
 
 
 
 
 
 
(1) Operating revenue in the California segment includes construction services revenue in the periods ended September 30, 2017.
(2) Operating revenue in the Washington segment includes construction services revenue in the periods ended September 30, 2018.
 
 
 
 
 
 
 
 
 
Three 
 Months 
 Ended 
 September 30, 
 2018
 
Three 
 Months 
 Ended 
 September 30, 
 2017
 
Nine 
 Months 
 Ended 
 September 30, 
 2018
 
Nine 
 Months 
 Ended 
 September 30, 
 2017
Income before provision for income taxes:
 
 
 
 
 
 
 
California
$
20,830

 
$
31,150

 
$
46,022

 
$
53,907

Arizona
5,688

 
3,388

 
13,048

 
11,102

Nevada
6,237

 
4,372

 
17,478

 
7,811

Colorado
5,467

 
969

 
14,248

 
2,519

Washington
12,297

 
6,164

 
28,046

 
10,249

Oregon
6,734

 
10,708

 
17,497

 
25,847

Texas
257

 

 
1,016

 

Corporate
(16,706
)
 
(12,786
)
 
(46,137
)
 
(31,112
)
Income before loss on extinguishment of debt
$
40,804

 
$
43,965

 
$
91,218

 
$
80,323

Corporate - Loss on extinguishment of debt

 

 

 
(21,828
)
Income before provision for income taxes
$
40,804

 
$
43,965

 
$
91,218

 
$
58,495

 

14



 
September 30, 2018
 
December 31, 2017
Homebuilding assets:
 
 
 
Owned:
 
 
 
California
$
987,598

 
$
631,649

Arizona
172,191

 
170,634

Nevada
205,859

 
211,202

Colorado
159,534

 
149,183

Washington
332,639

 
286,442

Oregon
408,814

 
288,981

Texas
232,679

 

Corporate (1)
234,915

 
323,013

 
$
2,734,229

 
$
2,061,104

Not Owned:
 
 
 
California
$
107,901

 
$

Texas
101,918

 

Total homebuilding assets
$
2,944,048

 
$
2,061,104

(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):
 
 
September 30, 2018
 
December 31, 2017
Real estate inventories:
 
 
 
Land deposits
$
113,142

 
$
51,833

Land and land under development
596,594

 
495,114

Finished lots
643,675

 
409,296

Homes completed and under construction
987,121

 
646,198

Model homes
96,918

 
97,409

Total
$
2,437,450

 
$
1,699,850

Real estate inventories not owned (1):
 
 
 
Other land options contracts — land banking arrangement
$
209,819

 
$


(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.

15



Note 7—Senior Notes, Secured, and Unsecured Indebtedness

Senior notes, secured, and unsecured indebtedness consist of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Notes payable:
 
 
 
Revolving credit facility
$
220,000

 
$

Seller financing

 
589

Construction notes payable
1,426

 

Joint venture notes payable
163,385

 
93,926

Total notes payable
384,811

 
94,515

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

 
149,362

7% Senior Notes due August 15, 2022
347,273

 
346,740

6% Senior Notes due September 1, 2023
343,568

 

5 7/8% Senior Notes due January 31, 2025
440,597

 
439,567

Total senior notes
1,131,438

 
935,669

 
 
 
 
Total notes payable and senior notes
$
1,516,249

 
$
1,030,184


As of September 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):
 
Year Ending December 31,
 
Remaining in 2018
$
1,426

2019
37,397

2020
7,288

2021
338,699

2022
350,000

Thereafter
800,000

 
$
1,534,810

Maturities above exclude premium on the 7% Senior Notes of $0.6 million and discount on the 5 7/8% Senior Notes of $2.9 million, and deferred loan costs on the 7%, 6%, and 5 7/8% Senior Notes of $16.3 million as of September 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)

16



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 September 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 September 30, 2018, the commitment fee on the unused portion of the New Facility accrues at an annual rate of 0.50%. As of September 30, 2018, the Company had $220.0 million outstanding against the New Facility at an effective rate of 5.5%, as well as a letter of credit for $7.9 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 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 September 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.

17



Seller Financing
During the nine months ended September 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 September 30, 2018 (in millions):

Issuance Date
 
Facility Size
 
Outstanding
 
Maturity
 
Current Rate
 
May, 2018
 
$
128.0

 
$
72.3

 
May, 2021
 
5.50
%
(3)
May, 2018
 
13.3

 
7.3

 
June, 2020
 
5.14
%
(4)
July, 2017
 
66.2

 
46.4

 
February, 2021
 
5.25
%
(3)
January, 2016
 
35.0

 
23.4

 
February, 2019
 
5.49
%
(2)
November, 2015
 
42.5

 
14.0

 
May, 2019
 
6.25
%
(5)
March, 2014
 
4.0

 


October, 2018
 
5.07
%
(1)
 
 
$
289.0

 
$
163.4

 
 
 
 
 
(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 greatest of the prime rate, federal funds effective rate +1.0%, or LIBOR +1.0%.
(4) Loan bears interest at LIBOR +2.90%.
(5) Loan bears interest at the prime rate +1.0%.
In addition to the above, the Company had $1.4 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 September 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 nine months ended September 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 September 30, 2018.

8 1/2% Senior Notes Due 2020

During the nine months ended September 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

18



related to the early extinguishment of debt of the 8.5% Notes during the nine months ended September 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 September 30, 2018, the outstanding amount of the 7.00% Notes was $350 million, excluding unamortized premium of $0.6 million and deferred loan costs of $3.3 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. In September 2018, the Company exchanged 100% of the 6.00% Notes tendered in the exchange offer for notes that are freely transferable and registered under the Exchange Act.
As of September 30, 2018, the outstanding principal amount of the 6.00% Notes was $350 million, excluding deferred loan costs of $6.4 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:

19



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 September 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 September 30, 2018, the outstanding principal amount of the 5.875% Notes was $450 million, excluding unamortized discount of $2.9 million and deferred loan costs of $6.5 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 indentures. The Company was in compliance with all such covenants as of September 30, 2018.


20



GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS
The following consolidating financial information includes:
(1) Consolidating balance sheets as of September 30, 2018 and December 31, 2017; consolidating statements of operations for the three and nine months ended September 30, 2018 and 2017; and consolidating statements of cash flows for the nine month periods ended September 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 September 30, 2018 and December 31, 2017, and for the three and nine month periods ended September 30, 2018 and 2017.

21




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

 
$
36,089

 
$
924

 
$
13,769

 
$

 
$
50,782

Receivables

 
3,290

 
3,966

 
3,305

 

 
10,561

Escrow proceeds receivable

 
381

 
(11
)
 

 

 
370

Real estate inventories

 

 

 

 

 

Owned

 
843,083

 
1,138,490

 
455,877

 

 
2,437,450

Not owned

 

 
209,819

 

 

 
209,819

Investment in unconsolidated joint ventures

 
4,959

 
150

 

 

 
5,109

Goodwill

 
14,209

 
104,668

 

 

 
118,877

Intangibles, net

 

 
6,700

 

 

 
6,700

Deferred income taxes, net

 
48,279

 

 

 

 
48,279

Lease right-of-use assets

 
15,353

 

 

 

 
15,353

Other assets, net

 
28,544

 
11,709

 
495

 

 
40,748

Investments in subsidiaries
829,218

 
17,876

 
(980,772
)
 

 
133,678

 

Intercompany receivables

 

 
281,709

 

 
(281,709
)
 

Total assets
$
829,218

 
$
1,012,063

 
$
777,352

 
$
473,446

 
$
(148,031
)
 
$
2,944,048

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
60,125

 
$
21,998

 
$
12,781

 
$

 
$
94,904

Accrued expenses

 
96,184

 
28,954

 
111

 

 
125,249

Liabilities from inventories not owned

 

 
209,819

 

 

 
209,819

Notes payable

 
220,000

 
1,426

 
163,385

 

 
384,811

7% Senior Notes

 
347,273

 

 

 

 
347,273

6% Senior Notes

 
343,568

 

 

 

 
343,568

5 7/8% Senior Notes

 
440,597

 

 

 

 
440,597

Intercompany payables

 
171,025

 

 
110,684

 
(281,709
)
 

Total liabilities

 
1,678,772

 
262,197

 
286,961

 
(281,709
)
 
1,946,221

Equity
 
 
 
 
 
 
 
 
 
 
 
William Lyon Homes stockholders’ equity
829,218

 
(666,709
)
 
515,155

 
17,876

 
133,678

 
829,218

Noncontrolling interests

 

 

 
168,609

 

 
168,609

Total liabilities and equity
$
829,218

 
$
1,012,063

 
$
777,352

 
$
473,446

 
$
(148,031
)
 
$
2,944,048


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
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 September 30, 2018
(in thousands)

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

 
$
160,850

 
$
304,115

 
$
68,549

 
$

 
$
533,514

Construction services

 

 
1,190

 

 

 
1,190

Management fees

 
(2,181
)
 

 

 
2,181

 

 

 
158,669

 
305,305

 
68,549

 
2,181

 
534,704

Operating costs
 
 
 
 
 
 
 
 
 
 
 
Cost of sales

 
(125,991
)
 
(252,406
)
 
(55,733
)
 
(2,181
)
 
(436,311
)
Construction services

 

 
(1,121
)
 

 

 
(1,121
)
Sales and marketing

 
(8,154
)
 
(17,012
)
 
(3,713
)
 

 
(28,879
)
General and administrative

 
(21,935
)
 
(8,100
)
 
(4
)
 

 
(30,039
)
Other

 
(591
)
 

 

 

 
(591
)
 

 
(156,671
)
 
(278,639
)
 
(59,450
)
 
(2,181
)
 
(496,941
)
Income from subsidiaries
26,558

 
8,682

 

 

 
(35,240
)
 

Operating income
26,558

 
10,680

 
26,666

 
9,099

 
(35,240
)
 
37,763

Equity in income of unconsolidated joint ventures

 
163

 
368

 

 

 
531

Other income (loss), net

 
802

 
1,323

 
385

 

 
2,510

Income before provision for income taxes
26,558

 
11,645

 
28,357

 
9,484

 
(35,240
)
 
40,804

Provision for income taxes

 
(8,990
)
 

 

 

 
(8,990
)
Net income
26,558

 
2,655

 
28,357

 
9,484

 
(35,240
)
 
31,814

Less: Net income attributable to noncontrolling interests

 

 

 
(5,256
)
 

 
(5,256
)
Net income available to common stockholders
$
26,558

 
$
2,655

 
$
28,357

 
$
4,228

 
$
(35,240
)
 
$
26,558



24




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

 
$
211,317

 
$
218,033

 
$
60,954

 
$

 
$
490,304

Construction services

 
35

 

 

 

 
35

Management fees

 
(1,899
)
 

 

 
1,899

 

 

 
209,453

 
218,033

 
60,954

 
1,899

 
490,339

Operating costs
 
 
 
 
 
 
 
 
 
 
 
Cost of sales

 
(165,392
)
 
(181,184
)
 
(53,225
)
 
(1,899
)
 
(401,700
)
Construction services