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, 2019 and December 31, 2018 and revenues and expenses for the three and nine month periods ended September 30, 2019 and 2018. 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 4). 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, 2018, which are included in our 2018 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.
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”).
Home Sales
Effective January 1, 2018, the Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 606, "Revenue Recognition" ("ASC 606"). Under ASC 606, revenue was recorded when a sale is consummated, the buyer’s initial and continuing investments is adequate, any receivables are not subject to future subordination, and the usual risks and rewards of ownership have transferred to the buyer. 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 2019 period that did not result from current period performance.
Construction Services
The Company accounts for construction management agreements using the Percentage of Completion Method in accordance with ASC 606. Under 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.
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 or other property 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 and nine months ended September 30, 2019, the Company had one and four land parcel sales, respectively, that resulted in a $0.9 million loss for both periods then ended. During the three and nine months ended September 30, 2018, the Company had three and six land parcel sales, respectively, that resulted in a $1.9 million gain, for both periods then ended. In addition, during the three and nine months ended September 30, 2019, the Company closed on a multi-family sale to a third party investor. The sales price of this transaction was $19.2 million and the related cost was $14.9 million, for a total profit of $4.3 million.
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, 2019 and 2018, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months
Ended
September 30,
2019
|
|
Nine
Months
Ended
September 30,
2018
|
|
Warranty liability, beginning of period
|
$
|
13,000
|
|
|
$
|
13,643
|
|
|
Warranty provision during period (1)
|
7,159
|
|
|
7,591
|
|
|
Warranty payments, net of insurance recoveries during period
|
(11,186)
|
|
|
(9,436)
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty charges related to construction services projects
|
17
|
|
|
30
|
|
|
Warranty liability, end of period
|
$
|
8,990
|
|
|
$
|
11,828
|
|
(1)In connection with the RSI Acquisition (see Note 3) in 2018, 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 8, is capitalized to qualifying real estate projects under development. Interest activity for the three and nine months ended September 30, 2019 and 2018 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
September 30,
2019
|
|
Three
Months
Ended
September 30,
2018
|
|
Nine
Months
Ended
September 30,
2019
|
|
Nine
Months
Ended
September 30,
2018
|
|
Interest incurred
|
$
|
25,449
|
|
|
$
|
24,725
|
|
|
$
|
73,439
|
|
|
$
|
66,791
|
|
|
Less: Interest capitalized
|
25,449
|
|
|
24,725
|
|
|
73,439
|
|
|
66,791
|
|
|
Interest expense, net of amounts capitalized
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash paid for interest
|
$
|
39,410
|
|
|
$
|
40,578
|
|
|
$
|
85,808
|
|
|
$
|
73,622
|
|
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-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 15.
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, 2019 and December 31, 2018. 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 6, 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.
Immaterial error correction
The Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 include the impact of correcting an error by increasing Cost of sales - homes by $6.6 million for the three and nine months ended September 30, 2019, relating to previously closed projects. The adjustments also decreased the amount of basic and diluted earnings per share by $0.13 for the three months ended September 30, 2019 and by $0.13 for the nine months ended September 30, 2019.
This correction had no impact on the previously reported amounts of net income, total equity, and consolidated cash flows from operating, investing or financing activities.
We evaluated this correction and determined, based on quantitative and qualitative factors, that the changes were not material to the consolidated financial statements taken as a whole for any previously filed consolidated financial statements
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 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.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which changes the impairment model for most financial assets and certain other instruments from an "incurred loss" approach to a new "expected credit loss" methodology. The FASB followed up with ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, in April 2019 and ASU 2019-05, Financial Instruments - Credit Losses (Topic 326), in May 2019 to provide further clarification on this topic. The standard is effective for annual and interim periods beginning January 1, 2020, and requires full retrospective application upon adoption. During October 2019, the FASB announced that certain entities, including smaller reporting companies, will be allowed additional implementation time with the standard becoming effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company does not anticipate a material impact to its consolidated financial statements as a result of adoption.
Note 2—Acquisition of South Pacific Financial Corporation
On April 8, 2019, the Company, through one of its recently formed subsidiaries, acquired 100% of the shares of South Pacific Financial Corporation, a California corporation ("SPFC"), for a net purchase price of $8.9 million pursuant to a stock purchase agreement (the “SPFC Acquisition”). The aggregate purchase price includes holdback provisions relating to certain amounts that may be incurred by the Company relating to previously existing obligations of the sellers and indemnity provisions. SPFC is an independent retail mortgage banking company based in Irvine, CA that is licensed in all of the Company’s existing homebuilding markets and has all of the GSE seller and servicer approvals, as well as Ginnie Mae authorization. Subsequent to the transaction, the Company changed the entity name of SPFC to ClosingMark Home Loans, Inc. ("ClosingMark Home Loans").
The Company financed the SPFC Acquisition with cash on hand of $3.9 million (net of cash received) at the time of closing. Up to the remaining $5.0 million will be paid to the sellers in two installments, subject to the terms of certain holdback and indemnity provisions, with the final balance being paid on November 1, 2021.
As a result of the SPFC Acquisition, SPFC and its subsidiary became wholly-owned indirect subsidiaries of the Company, and its results are included in our condensed consolidated financial statements and related disclosures from the date of the SPFC Acquisition.
The SPFC 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 SPFC 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 $4.5 million of goodwill resulting from the SPFC Acquisition will be tax deductible. Goodwill will be allocated to the Financial Services operating segment. A reconciliation of the consideration transferred as of the acquisition date is as follows:
|
|
|
|
|
|
|
|
Cash on hand
|
$
|
3,900
|
|
|
Purchase price holdback
|
5,000
|
|
|
|
$
|
8,900
|
|
As of September 30, 2019 the Company had not completed its final estimate of the fair value of the net assets of SPFC, as we have one year to finalize these net assets. As such, the estimates used as of September 30, 2019 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
|
|
|
|
|
Receivables
|
$
|
1,908
|
|
|
|
Mortgages held for sale
|
17,597
|
|
|
|
Derivative portfolio
|
1,519
|
|
|
|
Goodwill
|
4,500
|
|
|
|
Other
|
1,426
|
|
|
|
Total Assets
|
$
|
26,950
|
|
|
|
|
|
|
Liabilities Assumed
|
|
|
|
|
Accounts payable
|
$
|
206
|
|
|
|
Accrued expenses
|
3,053
|
|
|
|
Warehouse facilities
|
14,791
|
|
|
|
Total liabilities
|
18,050
|
|
|
|
Net assets acquired
|
$
|
8,900
|
|
The fair values of Mortgages held for sale are based on the fair value of the collateral less estimated cost to sell or discounted cash flows, if estimable. The fair value of the Derivative portfolio is based on quoted market prices, if available. The fair values for instruments that do not have quoted market prices are estimated by the Company on the basis of discounted cash flows or other financial information.
Other assets, accounts payable, accrued expenses and warehouse facilities were generally stated at historical value due to the short-term nature of these assets and liabilities.
The Company recorded zero and $1.0 million acquisition related costs for the three and nine months ended September 30, 2019, which are included in the Condensed Consolidated Statement of Operations in Transaction expenses in the Financial services segment. 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 and September 30, 2019 and September 30, 2018 as if the SPFC Acquisition, had been completed as of January 1, 2018 (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Three Months Ended September 30, 2018
|
|
Nine Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2018
|
|
Operating revenues
|
$
|
466,889
|
|
|
$
|
534,704
|
|
|
$
|
1,388,222
|
|
|
$
|
1,427,524
|
|
|
Net income available to common stockholders
|
$
|
9,480
|
|
|
$
|
26,900
|
|
|
$
|
26,627
|
|
|
$
|
58,160
|
|
|
Income per share - basic
|
$
|
0.25
|
|
|
$
|
0.71
|
|
|
$
|
0.71
|
|
|
$
|
1.53
|
|
|
Income per share - diluted
|
$
|
0.24
|
|
|
$
|
0.69
|
|
|
$
|
0.68
|
|
|
$
|
1.47
|
|
The unaudited pro forma operating results have been determined after adjusting the unaudited operating results of SPFC, but including acquisition costs. 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 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—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 $479.3 million, which is inclusive of approximately $15.2 million of net asset related adjustments at closing (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.
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 $56.8 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 6). 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
|
94,760
|
|
|
|
$
|
479,328
|
|
The Company completed its final estimate of the fair value of the net assets of RSI Communities during December 2018. The following table summarizes the amounts for acquired assets and liabilities recorded at their fair values as of the acquisition date (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Assets Acquired
|
|
|
|
|
Real estate inventories
|
$
|
434,628
|
|
|
|
Goodwill
|
56,793
|
|
|
|
Other
|
7,771
|
|
|
|
Total Assets
|
$
|
499,192
|
|
|
|
|
|
|
Liabilities Assumed
|
|
|
|
|
Accounts payable
|
$
|
9,315
|
|
|
|
Accrued expenses
|
8,244
|
|
|
|
Notes payable
|
2,305
|
|
|
|
Total liabilities
|
19,864
|
|
|
|
Net assets acquired
|
$
|
479,328
|
|
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 and nine months ended September 30, 2019 (excluding the transaction expenses incurred for the acquisition of South Pacific Financial Corporation, discussed in Note 2), and zero and $3.9 million in acquisition related costs for the three and nine months ended September 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 nine months ended September 30, 2018 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
|
|
Nine Months Ended September 30, 2018
|
|
Operating revenues
|
|
$
|
534,704
|
|
|
$
|
1,467,959
|
|
|
Net income available to common stockholders
|
|
$
|
26,558
|
|
|
$
|
57,143
|
|
|
Income per share - basic
|
|
$
|
0.70
|
|
|
$
|
1.51
|
|
|
Income per share - diluted
|
|
$
|
0.68
|
|
|
$
|
1.44
|
|
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 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 4—Variable Interest Entities and Noncontrolling Interests
As of September 30, 2019 and December 31, 2018, the Company was party to twenty-three and twenty 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, 2019 and December 31, 2018.
As of September 30, 2019, the assets of the consolidated VIEs totaled $446.0 million, of which $17.1 million was cash and cash equivalents and $403.8 million was owned real estate inventories. The liabilities of the consolidated VIEs totaled $221.2 million, primarily comprised of notes payable, accounts payable and accrued liabilities.
As of December 31, 2018, the assets of the consolidated VIEs totaled $434.8 million, of which $9.0 million was cash and cash equivalents and $422.7 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.
Note 5—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, 2019
|
|
Three Months Ended September 30, 2018
|
|
Nine Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2018
|
|
Revenues
|
$
|
2,706
|
|
|
$
|
3,975
|
|
|
$
|
13,693
|
|
|
$
|
11,863
|
|
|
Cost of sales
|
(2,062)
|
|
|
(2,974)
|
|
|
(8,389)
|
|
|
(7,901)
|
|
|
Income of unconsolidated joint ventures
|
$
|
644
|
|
|
$
|
1,001
|
|
|
$
|
5,304
|
|
|
$
|
3,962
|
|
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, 2019, and 2018, the Company recorded income of $0.4 million and $2.6 million and $0.5 million and $2.0 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.
On July 15, 2019, the Company acquired the joint venture partners' remaining 50% interest in Polygon Mortgage, LLC ("Polygon Mortgage Acquisition"), and a majority of their pipeline for $675.0 thousand in cash. The Polygon Mortgage Acquisition was accounted for as a step acquisition in accordance with ASC 805. The Company consolidated the assets and liabilities of Polygon Mortgage, LLC as of the acquisition date and recorded $2.4 million worth of Goodwill. As of September 30, 2019, the Company completed the integration of the operations of Polygon Mortgage into its wholly-owned ClosingMark Financial Group (see Note 9 - Financial Services). The Company recognized no gain or loss as a result of this acquisition.
On August 1, 2019 the Company acquired the majority of the existing pipeline of William Lyon Mortgage (the "WLM Pipeline Acquisition"). The Company closed the acquired loans through its ClosingMark Home Loans operations.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
|
$
|
2,463
|
|
|
$
|
8,093
|
|
|
|
Loans held for sale
|
|
|
—
|
|
|
27,958
|
|
|
|
Accounts receivable
|
|
|
23
|
|
|
884
|
|
|
|
Other assets
|
|
|
818
|
|
|
115
|
|
|
|
|
Total Assets
|
|
$
|
3,304
|
|
|
$
|
37,050
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
$
|
4
|
|
|
$
|
700
|
|
|
|
Accrued expenses
|
|
|
410
|
|
|
1,988
|
|
|
|
Credit lines payable
|
|
|
—
|
|
|
26,775
|
|
|
|
Other liabilities
|
|
|
87
|
|
|
49
|
|
|
|
Members equity
|
|
|
2,803
|
|
|
7,538
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
3,304
|
|
|
$
|
37,050
|
|
Note 6—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 3), 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, San Antonio, and Houston, 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.
Financial services consists of operations under the brand of ClosingMark Financial Group, LLC. Refer to Note 9 - Financial Services.
Segment financial information relating to the Company’s operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
September 30,
2019
|
|
Three
Months
Ended
September 30,
2018
|
|
Nine
Months
Ended
September 30,
2019
|
|
Nine
Months
Ended
September 30,
2018
|
|
Operating revenue (1):
|
|
|
|
|
|
|
|
|
California
|
$
|
179,518
|
|
|
$
|
201,316
|
|
|
$
|
533,447
|
|
|
$
|
510,581
|
|
|
Arizona
|
45,131
|
|
|
34,286
|
|
|
109,737
|
|
|
105,089
|
|
|
Nevada
|
39,512
|
|
|
49,816
|
|
|
111,793
|
|
|
145,205
|
|
|
Colorado
|
42,345
|
|
|
54,574
|
|
|
165,288
|
|
|
157,074
|
|
|
Washington (2)
|
62,006
|
|
|
82,177
|
|
|
165,066
|
|
|
223,318
|
|
|
Oregon
|
43,345
|
|
|
69,430
|
|
|
128,841
|
|
|
182,504
|
|
|
Texas
|
55,032
|
|
|
43,105
|
|
|
174,050
|
|
|
103,753
|
|
|
Total operating revenue
|
$
|
466,889
|
|
|
$
|
534,704
|
|
|
$
|
1,388,222
|
|
|
$
|
1,427,524
|
|
|
|
|
|
|
|
|
|
|
|
(1) Operating revenue excludes revenues generated from Financial services.
|
|
|
|
|
|
|
|
|
(2) Operating revenue in the Washington segment includes construction services revenue in the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
September 30,
2019
|
|
Three
Months
Ended
September 30,
2018
|
|
Nine
Months
Ended
September 30,
2019
|
|
Nine
Months
Ended
September 30,
2018
|
|
Income before provision for income taxes (1) :
|
|
|
|
|
|
|
|
|
California
|
$
|
17,557
|
|
|
$
|
20,830
|
|
|
$
|
43,796
|
|
|
$
|
46,022
|
|
|
Arizona
|
4,840
|
|
|
5,688
|
|
|
11,083
|
|
|
13,048
|
|
|
Nevada
|
4,134
|
|
|
6,237
|
|
|
10,370
|
|
|
17,478
|
|
|
Colorado
|
4,755
|
|
|
5,467
|
|
|
18,989
|
|
|
14,248
|
|
|
Washington
|
6,057
|
|
|
12,122
|
|
|
11,812
|
|
|
27,464
|
|
|
Oregon
|
(2,060)
|
|
|
6,541
|
|
|
2,192
|
|
|
17,224
|
|
|
Texas
|
2,676
|
|
|
257
|
|
|
8,496
|
|
|
1,016
|
|
|
Corporate
|
(17,581)
|
|
|
(16,869)
|
|
|
(48,504)
|
|
|
(47,278)
|
|
|
Financial services, net
|
3,743
|
|
|
531
|
|
|
3,821
|
|
|
1,996
|
|
|
Income before gain on extinguishment of debt
|
$
|
24,121
|
|
|
$
|
40,804
|
|
|
$
|
62,055
|
|
|
$
|
91,218
|
|
|
Corporate - (Loss) on extinguishment of debt
|
(1,816)
|
|
|
—
|
|
|
(1,433)
|
|
|
—
|
|
|
Income before provision for income taxes
|
$
|
22,305
|
|
|
$
|
40,804
|
|
|
$
|
60,622
|
|
|
$
|
91,218
|
|
|
|
|
|
|
|
|
|
|
|
(1) Balances for the periods ended September 30, 2018 were retroactively adjusted to reflect the presentation of Financial services, net per the Condensed Consolidated Statement of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Assets:
|
|
|
|
|
Owned:
|
|
|
|
|
California
|
$
|
827,846
|
|
|
$
|
930,714
|
|
|
Arizona
|
206,505
|
|
|
168,507
|
|
|
Nevada
|
183,142
|
|
|
189,363
|
|
|
Colorado
|
135,307
|
|
|
149,450
|
|
|
Washington
|
303,543
|
|
|
308,270
|
|
|
Oregon
|
459,430
|
|
|
440,105
|
|
|
Texas
|
284,263
|
|
|
234,093
|
|
|
Corporate (1)
|
235,334
|
|
|
193,696
|
|
|
|
$
|
2,635,370
|
|
|
$
|
2,614,198
|
|
|
Not Owned:
|
|
|
|
|
California
|
$
|
50,196
|
|
|
$
|
91,849
|
|
|
Arizona
|
90,603
|
|
|
114,858
|
|
|
Washington
|
17,396
|
|
|
21,657
|
|
|
Texas
|
57,346
|
|
|
87,212
|
|
|
Homebuilding assets
|
$
|
2,914,878
|
|
|
$
|
2,929,774
|
|
|
|
|
|
|
|
Financial services
|
$
|
168,093
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Total Assets
|
$
|
3,019,004
|
|
|
$
|
2,929,774
|
|
(1)Comprised primarily of cash and cash equivalents, receivables, goodwill, deferred income taxes, lease right-of-use assets, and other assets.
Note 7—Real Estate Inventories
Real estate inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Real estate inventories:
|
|
|
|
|
Land deposits
|
$
|
136,549
|
|
|
$
|
147,327
|
|
|
Land and land under development
|
589,025
|
|
|
660,151
|
|
|
Finished lots
|
614,117
|
|
|
564,460
|
|
|
Homes completed and under construction
|
872,815
|
|
|
839,316
|
|
|
Model homes
|
115,076
|
|
|
121,953
|
|
|
Total
|
$
|
2,327,582
|
|
|
$
|
2,333,207
|
|
|
Real estate inventories not owned (1):
|
|
|
|
|
Other land options contracts — land banking arrangement
|
$
|
215,541
|
|
|
$
|
315,576
|
|
(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 8—Senior Notes, Secured, and Unsecured Indebtedness
Senior notes, secured, and unsecured indebtedness consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
Notes payable:
|
|
|
|
|
Revolving credit facility
|
$
|
150,000
|
|
|
$
|
45,000
|
|
|
|
|
|
|
|
Construction notes payable
|
1,252
|
|
|
1,231
|
|
|
Joint venture notes payable
|
137,729
|
|
|
151,788
|
|
|
Total notes payable
|
288,981
|
|
|
198,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7% Senior Notes due August 15, 2022
|
49,762
|
|
|
347,456
|
|
|
6% Senior Notes due September 1, 2023
|
344,654
|
|
|
343,878
|
|
|
5.875% Senior Notes due January 31, 2025
|
429,121
|
|
|
431,992
|
|
|
6.625% Senior Notes due July 15, 2027
|
294,673
|
|
|
—
|
|
|
Total senior notes
|
1,118,210
|
|
|
1,123,326
|
|
|
|
|
|
|
|
Total notes payable and senior notes
|
$
|
1,407,191
|
|
|
$
|
1,321,345
|
|
As of September 30, 2019, the maturities of the Notes payable, 7% Senior Notes, 6% Senior Notes, 5.875% Senior Notes, and 6.625% Senior Notes are as follows (in thousands):
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
Remaining in 2019
|
$
|
1,252
|
|
|
2020
|
49,530
|
|
|
2021
|
88,199
|
|
|
2022
|
200,000
|
|
|
2023
|
350,000
|
|
|
Thereafter
|
736,886
|
|
|
|
$
|
1,425,867
|
|
Maturities above exclude premium on the 7% Senior Notes of $69.4 thousand and discount on the 5.875% Senior Notes of $2.5 million, and deferred loan costs on the 7%, 6%, 5.875%, and 6.625% Senior Notes of $16.3 million as of September 30, 2019.
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 initially matured on May 21, 2021, unless terminated earlier pursuant to the terms of the New Facility. In July 2019, the Company extended the maturity one year to May 21, 2022. 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. Effective as of November 9, 2018, California Lyon increased the size of the commitment under its revolving credit facility by $40.0 million to an aggregate total of $365.0 million, through entry into a new lender supplement as of such date.
On December 18, 2018, California Lyon, Parent and the lenders party thereto entered into an amendment to the New Facility, which amended the maximum leverage ratio to extend the timing of the gradual step-downs, such that the leverage ratio remained at 65% through and including December 30, 3018, decreased to 62.5% on the last day of the 2018 fiscal year
through and including December 30, 2019, and further decreases and remains at 60% on December 31, 2019 and thereafter. The amendment did not revise any of our other financial covenants thereunder.
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, 2019, the commitment fee on the unused portion of the New Facility accrues at an annual rate of 0.50%. As of September 30, 2019, the Company had $150.0 million outstanding against the New Facility at an effective rate of 4.6%, as well as a letter of credit for $9.5 million. Other than those mentioned above, as of September 30, 2019, the Company had no borrowing limitations under the New Facility. As of December 31, 2018, the Company had $45.0 million outstanding against the New Facility at an effective rate of 7.0%, as well as a letter of credit for $8.6 million.
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 December 30, 2018, further decreased to 62.5% effective as of December 31, 2018, through and including December 30, 2019, and further decreases to and remains 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 September 30, 2019.
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 December 31, 2018, the Company had terminated the Second Amended Facility by entering into the New Facility.
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, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
Facility Size
|
|
Outstanding
|
|
Maturity
|
|
Current Rate
|
|
|
March, 2019
|
|
$
|
18.9
|
|
|
$
|
2.2
|
|
|
November, 2020
|
|
4.94
|
%
|
(3)
|
|
|
May, 2018
|
|
128.0
|
|
|
115.0
|
|
|
May, 2021
|
|
5.15
|
%
|
(2)
|
|
|
May, 2018
|
|
13.3
|
|
|
13.3
|
|
|
June, 2020
|
|
4.94
|
%
|
(3)
|
|
|
July, 2017
|
|
66.2
|
|
|
2.8
|
|
|
February, 2021
|
|
5.10
|
%
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January, 2016
|
|
35.0
|
|
|
4.4
|
|
|
February, 2020
|
|
5.29
|
%
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
261.4
|
|
|
$
|
137.7
|
|
|
|
|
|
|
(1) Loan bears interest at LIBOR +3.25%. The Company intends to extend the maturity of this borrowing prior to its expiration date.
(2) Loan bears interest at the greatest of the prime rate, federal funds effective rate +1.0%, or LIBOR +1.0%.
(3) Loan bears interest at LIBOR +2.90%.
In addition to the above, the Company had $1.3 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, 2019.
Senior Notes
5.75% 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.
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.
On July 9, 2019, California Lyon, completed the sale to certain purchasers ("the "Offering") of $300 million in aggregate principal amount of 6.625% Senior Notes due 2027, described below. Parent, through California Lyon, used the net proceeds from the Offering, as well as cash on hand, to redeem $300 million in aggregate principal amount of California Lyon’s outstanding $350 million of 7.00% Notes. This redemption of the principal balance resulted in $1.8 million of loss on debt extinguishment recorded through earnings. As of September 30, 2019, the outstanding amount of the 7.00% Notes was $50 million, excluding unamortized premium of $69.4 thousand and deferred loan costs of $0.3 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, $437 million in aggregate principal amount of 5.875% Senior Notes due 2025, and $300 million in aggregate principal amount of 6.625% Senior Notes due 2027, 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, 2019, the outstanding principal amount of the 6.00% Notes was $350 million, excluding deferred loan costs of $5.3 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 $50 million in aggregate principal amount of 7.00% Senior Notes due 2022, as described above, $437 million in aggregate principal amount of 5.875% Senior Notes due 2025, and $300 million in aggregate principal amount of 6.625% Senior Notes due 2027, each 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 prior year 8.5% Notes such that the entire aggregate $425 million of previously outstanding 8.5% Notes were retired and extinguished as of December 31, 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, 2019, the outstanding principal amount of the 5.875% Notes was $437 million, excluding unamortized discount of $2.5 million and deferred loan costs of $5.3 million. During the nine months ended September 30, 2019, the Company retired approximately $4.0 million of the principal balance, resulting in $0.4 million of gain on debt extinguishment recognized through earnings. 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 $50 million in aggregate principal amount of 7.00% Senior Notes due 2022, $350 million in aggregate principal amount of 6.00% Senior Notes due 2023, each as described above, and $300 million in aggregate principal amount of 6.625% Senior Notes due 2027, described below. 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.
6.625% Senior Notes Due 2027
On July 9, 2019, California Lyon completed the sale to certain purchasers ("the "Offering") of $300 million in aggregate principal amount of 6.625% Senior Notes due 2027 (the "6.625% Notes"). Parent, through California Lyon, used the net proceeds from the Offering, as well as cash on hand, to redeem $300 million in aggregate principal amount of California Lyon’s outstanding $350 million of 7.00% Notes. This redemption of the principal balance resulted in $1.8 million of loss on debt extinguishment recorded through earnings. As of September 30, 2019, the outstanding amount of the 6.625% Notes was $300 million, excluding deferred loan costs of $5.3 million. The 6.625% Notes bear interest at a rate of 6.625%, payable on January 15 and July 15, and mature on July 15, 2027. The 6.625% Notes are unconditionally guaranteed on a joint and several unsecured basis by Parent and certain of its existing and future restricted subsidiaries. The 6.625% 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 $50 million in aggregate principal amount of 7.00% Senior Notes due 2022, $350 million in aggregate principal amount of 6.00% Senior Notes due 2023, and $437 million in aggregate principal amount of 5.875% Senior Notes due 2025, each as described above. The 6.625% Notes rank senior in right of payment to all of California Lyon’s and the guarantors’ future subordinated debt. The 6.625% 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 and after July 15, 2022, California Lyon may redeem all or a portion of the 6.625% Notes upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed in 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
|
|
July 15, 2022
|
103.31
|
%
|
|
July 15, 2023
|
102.21
|
%
|
|
July 15, 2024
|
101.10
|
%
|
|
July 15, 2025 and thereafter
|
100.00
|
%
|
Prior to July 15, 2022, 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, at any time prior to July 15, 2022, 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 2027 Notes Indenture) in an aggregate principal amount not to exceed 40% of the aggregate principal amount of the Notes (including any additional notes that may be issued in the future under the 2027 Notes Indenture) issued prior to such date at a redemption price (expressed as a percentage of principal amount) of 106.625%, 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. If California Lyon experiences certain change of control events (as defined in the 2027 Notes Indenture), holders of the Notes will have the right to require California Lyon to repurchase all or a portion of the Notes at 101% of the principal amount thereof on the date of purchase plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).
Senior Notes Covenant Compliance
The indentures governing the 7.00% Notes, the 6.00% Notes, the 5.875%, and the 6.625% Notes 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, 2019.
GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS
The following consolidating financial information includes:
(1) Consolidating balance sheets as of September 30, 2019 and December 31, 2018; consolidating statements of operations for the three and nine months ended September 30, 2019 and 2018; and consolidating statements of cash flows for the nine month periods ended September 30, 2019 and 2018, 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, 2019 and December 31, 2018, and for the three and nine month periods ended September 30, 2019 and 2018.
CONDENSED CONSOLIDATING BALANCE SHEET
(Unaudited)
As of September 30, 2019
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
Delaware
Lyon
|
|
California
Lyon
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminating
Entries
|
|
Consolidated
Company
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
22,138
|
|
|
$
|
2,562
|
|
|
$
|
17,418
|
|
|
$
|
—
|
|
|
$
|
42,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
—
|
|
|
5,071
|
|
|
2,392
|
|
|
5,106
|
|
|
—
|
|
|
12,569
|
|
|
Escrow proceeds receivable
|
—
|
|
|
2,764
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
|
—
|
|
|
751,733
|
|
|
1,157,784
|
|
|
418,065
|
|
|
—
|
|
|
2,327,582
|
|
|
Not owned
|
—
|
|
|
90,603
|
|
|
124,938
|
|
|
—
|
|
|
—
|
|
|
215,541
|
|
|
Investment in unconsolidated joint ventures
|
—
|
|
|
1,552
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,552
|
|
|
Goodwill
|
—
|
|
|
14,209
|
|
|
109,486
|
|
|
—
|
|
|
—
|
|
|
123,695
|
|
|
Intangibles, net
|
—
|
|
|
—
|
|
|
6,700
|
|
|
—
|
|
|
—
|
|
|
6,700
|
|
|
Deferred income taxes, net
|
—
|
|
|
46,254
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46,254
|
|
|
Lease right-of-use assets
|
—
|
|
|
18,283
|
|
|
—
|
|
|
18,717
|
|
|
—
|
|
|
37,000
|
|
|
Financial services assets
|
—
|
|
|
—
|
|
|
—
|
|
|
168,093
|
|
|
—
|
|
|
168,093
|
|
|
Other assets, net
|
—
|
|
|
23,798
|
|
|
9,301
|
|
|
2,037
|
|
|
—
|
|
|
35,136
|
|
|
Investments in subsidiaries
|
895,965
|
|
|
28,859
|
|
|
(955,693)
|
|
|
—
|
|
|
30,869
|
|
|
—
|
|
|
Intercompany receivables
|
—
|
|
|
—
|
|
|
300,196
|
|
|
(21,508)
|
|
|
(278,688)
|
|
|
—
|
|
|
Total assets
|
$
|
895,965
|
|
|
$
|
1,005,264
|
|
|
$
|
757,666
|
|
|
$
|
607,928
|
|
|
$
|
(247,819)
|
|
|
$
|
3,019,004
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
—
|
|
|
$
|
45,981
|
|
|
$
|
34,393
|
|
|
$
|
34,436
|
|
|
$
|
—
|
|
|
$
|
114,810
|
|
|
Accrued expenses
|
—
|
|
|
93,385
|
|
|
8,775
|
|
|
103
|
|
|
—
|
|
|
102,263
|
|
|
Financial services liabilities
|
—
|
|
|
—
|
|
|
—
|
|
|
146,836
|
|
|
—
|
|
|
146,836
|
|
|
Liabilities from inventories not owned
|
—
|
|
|
90,603
|
|
|
124,938
|
|
|
—
|
|
|
—
|
|
|
215,541
|
|
|
Notes payable
|
—
|
|
|
150,000
|
|
|
1,252
|
|
|
137,729
|
|
|
—
|
|
|
288,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7% Senior Notes
|
—
|
|
|
49,762
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49,762
|
|
|
6% Senior Notes
|
—
|
|
|
344,654
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
344,654
|
|
|
5.875% Senior Notes
|
—
|
|
|
429,121
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
429,121
|
|
|
6.625% Senior Notes
|
—
|
|
|
294,673
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
294,673
|
|
|
Intercompany payables
|
—
|
|
|
155,121
|
|
|
—
|
|
|
123,567
|
|
|
(278,688)
|
|
|
—
|
|
|
Total liabilities
|
—
|
|
|
1,653,300
|
|
|
169,358
|
|
|
442,671
|
|
|
(278,688)
|
|
|
1,986,641
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
William Lyon Homes stockholders’ equity
|
895,965
|
|
|
(648,036)
|
|
|
588,308
|
|
|
28,859
|
|
|
30,869
|
|
|
895,965
|
|
|
Noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
136,398
|
|
|
—
|
|
|
136,398
|
|
|
Total liabilities and equity
|
$
|
895,965
|
|
|
$
|
1,005,264
|
|
|
$
|
757,666
|
|
|
$
|
607,928
|
|
|
$
|
(247,819)
|
|
|
$
|
3,019,004
|
|
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2018
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
Delaware
Lyon
|
|
California
Lyon
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminating
Entries
|
|
Consolidated
Company
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
21,450
|
|
|
$
|
2,888
|
|
|
$
|
9,441
|
|
|
$
|
—
|
|
|
$
|
33,779
|
|
|
Receivables
|
—
|
|
|
6,054
|
|
|
4,151
|
|
|
3,297
|
|
|
—
|
|
|
13,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
|
—
|
|
|
745,750
|
|
|
1,152,786
|
|
|
434,671
|
|
|
—
|
|
|
2,333,207
|
|
|
Not owned
|
—
|
|
|
114,859
|
|
|
200,717
|
|
|
—
|
|
|
—
|
|
|
315,576
|
|
|
Investment in unconsolidated joint ventures
|
—
|
|
|
5,392
|
|
|
150
|
|
|
—
|
|
|
—
|
|
|
5,542
|
|
|
Goodwill
|
—
|
|
|
14,209
|
|
|
109,486
|
|
|
—
|
|
|
—
|
|
|
123,695
|
|
|
Intangibles, net
|
—
|
|
|
—
|
|
|
6,700
|
|
|
—
|
|
|
—
|
|
|
6,700
|
|
|
Deferred income taxes, net
|
—
|
|
|
47,241
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47,241
|
|
|
Lease right-of-use assets
|
—
|
|
|
13,561
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,561
|
|
|
Other assets, net
|
—
|
|
|
26,797
|
|
|
9,688
|
|
|
486
|
|
|
—
|
|
|
36,971
|
|
|
Investments in subsidiaries
|
863,322
|
|
|
16,059
|
|
|
(961,950)
|
|
|
—
|
|
|
82,569
|
|
|
—
|
|
|
Intercompany receivables
|
—
|
|
|
—
|
|
|
285,675
|
|
|
—
|
|
|
(285,675)
|
|
|
—
|
|
|
Total assets
|
$
|
863,322
|
|
|
$
|
1,011,372
|
|
|
$
|
810,291
|
|
|
$
|
447,895
|
|
|
$
|
(203,106)
|
|
|
$
|
2,929,774
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
—
|
|
|
$
|
78,462
|
|
|
$
|
34,546
|
|
|
$
|
15,363
|
|
|
$
|
—
|
|
|
$
|
128,371
|
|
|
Accrued expenses
|
—
|
|
|
123,088
|
|
|
26,967
|
|
|
100
|
|
|
—
|
|
|
150,155
|
|
|
Liabilities from inventories not owned
|
—
|
|
|
114,859
|
|
|
200,717
|
|
|
—
|
|
|
—
|
|
|
315,576
|
|
|
Notes payable
|
—
|
|
|
45,000
|
|
|
1,231
|
|
|
151,788
|
|
|
—
|
|
|
198,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7% Senior Notes
|
—
|
|
|
347,456
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
347,456
|
|
|
6% Senior Notes
|
—
|
|
|
343,878
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
343,878
|
|
|
5.875% Senior Notes
|
—
|
|
|
431,992
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
431,992
|
|
|
Intercompany payables
|
—
|
|
|
172,095
|
|
|
—
|
|
|
113,580
|
|
|
(285,675)
|
|
|
—
|
|
|
Total liabilities
|
—
|
|
|
1,656,830
|
|
|
263,461
|
|
|
280,831
|
|
|
(285,675)
|
|
|
1,915,447
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
William Lyon Homes stockholders’ equity
|
863,322
|
|
|
(645,458)
|
|
|
546,830
|
|
|
16,059
|
|
|
82,569
|
|
|
863,322
|
|
|
Noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
151,005
|
|
|
—
|
|
|
151,005
|
|
|
Total liabilities and equity
|
$
|
863,322
|
|
|
$
|
1,011,372
|
|
|
$
|
810,291
|
|
|
$
|
447,895
|
|
|
$
|
(203,106)
|
|
|
$
|
2,929,774
|
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended September 30, 2019
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
Delaware
Lyon
|
|
California
Lyon
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminating
Entries
|
|
Consolidated
Company
|
|
Operating revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales
|
$
|
—
|
|
|
$
|
62,633
|
|
|
$
|
300,362
|
|
|
$
|
101,770
|
|
|
$
|
—
|
|
|
$
|
464,765
|
|
|
Construction services
|
—
|
|
|
—
|
|
|
2,124
|
|
|
—
|
|
|
—
|
|
|
2,124
|
|
|
Management fees
|
—
|
|
|
(2,181)
|
|
|
—
|
|
|
—
|
|
|
2,181
|
|
|
—
|
|
|
|
—
|
|
|
60,452
|
|
|
302,486
|
|
|
101,770
|
|
|
2,181
|
|
|
466,889
|
|
|
Operating costs
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales - homes
|
—
|
|
|
(42,407)
|
|
|
(270,889)
|
|
|
(79,181)
|
|
|
(2,181)
|
|
|
(394,658)
|
|
|
Construction services
|
—
|
|
|
—
|
|
|
(1,978)
|
|
|
—
|
|
|
—
|
|
|
(1,978)
|
|
|
Sales and marketing
|
—
|
|
|
(6,991)
|
|
|
(14,982)
|
|
|
(3,271)
|
|
|
—
|
|
|
(25,244)
|
|
|
General and administrative
|
—
|
|
|
(22,505)
|
|
|
(7,782)
|
|
|
(5)
|
|
|
—
|
|
|
(30,292)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
—
|
|
|
(600)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(600)
|
|
|
|
—
|
|
|
(72,503)
|
|
|
(295,631)
|
|
|
(82,457)
|
|
|
(2,181)
|
|
|
(452,772)
|
|
|
Income from subsidiaries
|
9,480
|
|
|
11,593
|
|
|
—
|
|
|
—
|
|
|
(21,073)
|
|
|
—
|
|
|
Operating income
|
9,480
|
|
|
(458)
|
|
|
6,855
|
|
|
19,313
|
|
|
(21,073)
|
|
|
14,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of unconsolidated joint ventures
|
—
|
|
|
—
|
|
|
—
|
|
|
353
|
|
|
—
|
|
|
353
|
|
|
Income from financial services operations
|
—
|
|
|
—
|
|
|
—
|
|
|
3,390
|
|
|
—
|
|
|
3,390
|
|
|
Transaction expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Financial services income
|
—
|
|
|
—
|
|
|
—
|
|
|
3,743
|
|
|
—
|
|
|
3,743
|
|
|
Other income, net
|
—
|
|
|
6,485
|
|
|
179
|
|
|
(403)
|
|
|
—
|
|
|
6,261
|
|
|
Income before extinguishment of debt
|
9,480
|
|
|
6,027
|
|
|
7,034
|
|
|
22,653
|
|
|
(21,073)
|
|
|
24,121
|
|
|
(Loss) on extinguishment of debt
|
—
|
|
|
(1,816)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,816)
|
|
|
Income before provision for income taxes
|
9,480
|
|
|
4,211
|
|
|
7,034
|
|
|
22,653
|
|
|
(21,073)
|
|
|
22,305
|
|
|
Provision for income taxes
|
—
|
|
|
(4,795)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,795)
|
|
|
Net income
|
9,480
|
|
|
(584)
|
|
|
7,034
|
|
|
22,653
|
|
|
(21,073)
|
|
|
17,510
|
|
|
Less: Net income attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,030)
|
|
|
—
|
|
|
(8,030)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
9,480
|
|
|
$
|
(584)
|
|
|
$
|
7,034
|
|
|
$
|
14,623
|
|
|
$
|
(21,073)
|
|
|
$
|
9,480
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
Home 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 - homes
|
—
|
|
|
(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 from unconsolidated joint ventures
|
—
|
|
|
163
|
|
|
368
|
|
|
—
|
|
|
—
|
|
|
531
|
|
|
Other income (expense), 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(Unaudited)
Nine Months Ended September 30, 2019
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
Delaware
Lyon
|
|
California
Lyon
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminating
Entries
|
|
Consolidated
Company
|
|
Operating revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales
|
$
|
—
|
|
|
$
|
305,843
|
|
|
$
|
847,912
|
|
|
$
|
228,302
|
|
|
$
|
—
|
|
|
$
|
1,382,057
|
|
|
Construction services
|
—
|
|
|
—
|
|
|
6,165
|
|
|
—
|
|
|
—
|
|
|
6,165
|
|
|
Management fees
|
—
|
|
|
(6,034)
|
|
|
—
|
|
|
—
|
|
|
6,034
|
|
|
—
|
|
|
|
—
|
|
|
299,809
|
|
|
854,077
|
|
|
228,302
|
|
|
6,034
|
|
|
1,388,222
|
|
|
Operating costs
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales - homes
|
—
|
|
|
(243,044)
|
|
|
(736,457)
|
|
|
(179,650)
|
|
|
(6,034)
|
|
|
(1,165,185)
|
|
|
Construction services
|
—
|
|
|
—
|
|
|
(5,732)
|
|
|
—
|
|
|
—
|
|
|
(5,732)
|
|
|
Sales and marketing
|
—
|
|
|
(21,599)
|
|
|
(46,257)
|
|
|
(8,031)
|
|
|
—
|
|
|
(75,887)
|
|
|
General and administrative
|
—
|
|
|
(64,096)
|
|
|
(24,785)
|
|
|
(9)
|
|
|
—
|
|
|
(88,890)
|
|
|
Transaction expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other
|
—
|
|
|
(2,288)
|
|
|
572
|
|
|
77
|
|
|
—
|
|
|
(1,639)
|
|
|
|
—
|
|
|
(331,027)
|
|
|
(812,659)
|
|
|
(187,613)
|
|
|
(6,034)
|
|
|
(1,337,333)
|
|
|
Income from subsidiaries
|
28,050
|
|
|
29,203
|
|
|
—
|
|
|
—
|
|
|
(57,253)
|
|
|
—
|
|
|
Operating income
|
28,050
|
|
|
(2,015)
|
|
|
41,418
|
|
|
40,689
|
|
|
(57,253)
|
|
|
50,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of unconsolidated joint ventures
|
—
|
|
|
1,768
|
|
|
522
|
|
|
353
|
|
|
—
|
|
|
2,643
|
|
|
Income from financial services operations
|
—
|
|
|
—
|
|
|
—
|
|
|
2,168
|
|
|
—
|
|
|
2,168
|
|
|
Transaction expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(990)
|
|
|
—
|
|
|
(990)
|
|
|
Financial services income
|
—
|
|
|
1,768
|
|
|
522
|
|
|
1,531
|
|
|
—
|
|
|
3,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
—
|
|
|
8,250
|
|
|
268
|
|
|
(1,173)
|
|
|
—
|
|
|
7,345
|
|
|
Income before extinguishment of debt
|
28,050
|
|
|
8,003
|
|
|
42,208
|
|
|
41,047
|
|
|
(57,253)
|
|
|
62,055
|
|
|
(Loss) on extinguishment of debt
|
—
|
|
|
(1,433)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,433)
|
|
|
Income before provision for income taxes
|
28,050
|
|
|
6,570
|
|
|
42,208
|
|
|
41,047
|
|
|
(57,253)
|
|
|
60,622
|
|
|
Provision for income taxes
|
—
|
|
|
(13,548)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,548)
|
|
|
Net income
|
28,050
|
|
|
(6,978)
|
|
|
42,208
|
|
|
41,047
|
|
|
(57,253)
|
|
|
47,074
|
|
|
Less: Net income attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
(19,024)
|
|
|
—
|
|
|
(19,024)
|
|
|
Net income available to common stockholders
|
$
|
28,050
|
|
|
$
|
(6,978)
|
|
|
$
|
42,208
|
|
|
$
|
22,023
|
|
|
$
|
(57,253)
|
|
|
$
|
28,050
|
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(Unaudited)
Nine Months Ended September 30, 2018
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
Delaware
Lyon
|
|
California
Lyon
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminating
Entries
|
|
Consolidated
Company
|
|
Operating revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales
|
$
|
—
|
|
|
$
|
446,173
|
|
|
$
|
803,111
|
|
|
$
|
175,047
|
|
|
$
|
—
|
|
|
$
|
1,424,331
|
|
|
Construction services
|
—
|
|
|
—
|
|
|
3,193
|
|
|
—
|
|
|
—
|
|
|
3,193
|
|
|
Management fees
|
—
|
|
|
(5,560)
|
|
|
—
|
|
|
—
|
|
|
5,560
|
|
|
—
|
|
|
|
—
|
|
|
440,613
|
|
|
806,304
|
|
|
175,047
|
|
|
5,560
|
|
|
1,427,524
|
|
|
Operating costs
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales - homes
|
—
|
|
|
(353,519)
|
|
|
(667,040)
|
|
|
(143,072)
|
|
|
(5,560)
|
|
|
(1,169,191)
|
|
|
Construction services
|
—
|
|
|
—
|
|
|
(3,063)
|
|
|
—
|
|
|
—
|
|
|
(3,063)
|
|
|
Sales and marketing
|
—
|
|
|
(24,237)
|
|
|
(45,458)
|
|
|
(10,725)
|
|
|
—
|
|
|
(80,420)
|
|
|
General and administrative
|
—
|
|
|
(59,803)
|
|
|
(23,258)
|
|
|
(6)
|
|
|
—
|
|
|
(83,067)
|
|
|
Transaction expenses
|
—
|
|
|
(3,907)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,907)
|
|
|
Other
|
—
|
|
|
(1,624)
|
|
|
84
|
|
|
30
|
|
|
—
|
|
|
(1,510)
|
|
|
|
—
|
|
|
(443,090)
|
|
|
(738,735)
|
|
|
(153,773)
|
|
|
(5,560)
|
|
|
(1,341,158)
|
|
|
Income from subsidiaries
|
57,341
|
|
|
22,304
|
|
|
—
|
|
|
—
|
|
|
(79,645)
|
|
|
—
|
|
|
Operating income
|
57,341
|
|
|
19,827
|
|
|
67,569
|
|
|
21,274
|
|
|
(79,645)
|
|
|
86,366
|
|
|
Equity in income from unconsolidated joint ventures
|
—
|
|
|
1,127
|
|
|
869
|
|
|
—
|
|
|
—
|
|
|
1,996
|
|
|
Other income (expense), net
|
—
|
|
|
1,823
|
|
|
1,374
|
|
|
(341)
|
|
|
—
|
|
|
2,856
|
|
|
Income before provision for income taxes
|
57,341
|
|
|
22,777
|
|
|
69,812
|
|
|
20,933
|
|
|
(79,645)
|
|
|
91,218
|
|
|
Provision for income taxes
|
—
|
|
|
(19,580)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19,580)
|
|
|
Net income
|
57,341
|
|
|
3,197
|
|
|
69,812
|
|
|
20,933
|
|
|
(79,645)
|
|
|
71,638
|
|
|
Less: Net income (loss) attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,297)
|
|
|
—
|
|
|
(14,297)
|
|
|
Net income available to common stockholders
|
$
|
57,341
|
|
|
$
|
3,197
|
|
|
$
|
69,812
|
|
|
$
|
6,636
|
|
|
$
|
(79,645)
|
|
|
$
|
57,341
|
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, 2019
(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
|
$
|
(4,593)
|
|
|
$
|
(75,133)
|
|
|
$
|
22,505
|
|
|
$
|
(67,784)
|
|
|
$
|
(13,926)
|
|
|
$
|
(138,931)
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in (advances to) unconsolidated joint ventures
|
—
|
|
|
1,850
|
|
|
150
|
|
|
(2,000)
|
|
|
—
|
|
|
—
|
|
|
Cash paid for acquisitions, net of cash acquired
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,575)
|
|
|
—
|
|
|
(4,575)
|
|
|
Purchases of property and equipment
|
—
|
|
|
—
|
|
|
(1,494)
|
|
|
(17)
|
|
|
—
|
|
|
(1,511)
|
|
|
Investments in subsidiaries
|
—
|
|
|
(2,116)
|
|
|
(6,257)
|
|
|
—
|
|
|
8,373
|
|
|
—
|
|
|
Net cash (used in) provided by investing activities
|
—
|
|
|
(266)
|
|
|
(7,601)
|
|
|
(6,592)
|
|
|
8,373
|
|
|
(6,086)
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings on notes payable
|
—
|
|
|
—
|
|
|
138
|
|
|
108,795
|
|
|
—
|
|
|
108,933
|
|
|
Principal payments on notes payable
|
—
|
|
|
—
|
|
|
(117)
|
|
|
(122,854)
|
|
|
—
|
|
|
(122,971)
|
|
|
Principal payments on 5.875% Senior Notes
|
—
|
|
|
(3,591)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,591)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on 7.0% Senior Notes
|
—
|
|
|
(300,000)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(300,000)
|
|
|
Proceeds from issuance of 6.625% Senior Notes
|
—
|
|
|
300,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
300,000
|
|
|
Proceeds from borrowings on Revolver
|
—
|
|
|
537,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
537,000
|
|
|
Payments on Revolver
|
—
|
|
|
(432,000)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(432,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under warehouse facilities, net
|
—
|
|
|
—
|
|
|
—
|
|
|
109,035
|
|
|
—
|
|
|
109,035
|
|
|
Payment of principal portion of finance lease liabilities
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,264)
|
|
|
—
|
|
|
(1,264)
|
|
|
Payment of deferred loan costs
|
—
|
|
|
(5,787)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,787)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock options exercised
|
—
|
|
|
(12)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12)
|
|
|
Shares remitted to, or withheld by the Company for employee tax withholding
|
—
|
|
|
(2,356)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,356)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest contributions
|
—
|
|
|
—
|
|
|
—
|
|
|
2,854
|
|
|
—
|
|
|
2,854
|
|
|
Noncontrolling interest distributions
|
—
|
|
|
—
|
|
|
—
|
|
|
(36,485)
|
|
|
—
|
|
|
(36,485)
|
|
|
Advances to affiliates
|
4,593
|
|
|
—
|
|
|
(730)
|
|
|
(9,223)
|
|
|
5,360
|
|
|
—
|
|
|
Intercompany receivables/payables
|
—
|
|
|
(17,167)
|
|
|
(14,521)
|
|
|
31,495
|
|
|
193
|
|
|
—
|
|
|
Net cash provided by (used in) financing activities
|
4,593
|
|
|
76,087
|
|
|
(15,230)
|
|
|
82,353
|
|
|
5,553
|
|
|
153,356
|
|
|
Net increase (decrease) in cash and cash equivalents
|
—
|
|
|
688
|
|
|
(326)
|
|
|
7,977
|
|
|
—
|
|
|
8,339
|
|
|
Cash and cash equivalents - beginning of period
|
—
|
|
|
21,450
|
|
|
2,888
|
|
|
9,441
|
|
|
—
|
|
|
33,779
|
|
|
Cash and cash equivalents - end of period
|
$
|
—
|
|
|
$
|
22,138
|
|
|
$
|
2,562
|
|
|
$
|
17,418
|
|
|
$
|
—
|
|
|
$
|
42,118
|
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended September 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
|
$
|
8,595
|
|
|
$
|
4,151
|
|
|
$
|
17,046
|
|
|
$
|
(189,404)
|
|
|
$
|
(25,384)
|
|
|
$
|
(184,996)
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired
|
—
|
|
|
—
|
|
|
(475,221)
|
|
|
—
|
|
|
—
|
|
|
(475,221)
|
|
|
Purchases of property and equipment
|
—
|
|
|
(3,502)
|
|
|
(4,013)
|
|
|
15
|
|
|
—
|
|
|
(7,500)
|
|
|
Investments in subsidiaries
|
—
|
|
|
(28,905)
|
|
|
486,571
|
|
|
—
|
|
|
(457,666)
|
|
|
—
|
|
|
Net cash (used in) provided by investing activities
|
—
|
|
|
(32,407)
|
|
|
7,337
|
|
|
15
|
|
|
(457,666)
|
|
|
(482,721)
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings on notes payable
|
—
|
|
|
—
|
|
|
234
|
|
|
151,317
|
|
|
—
|
|
|
151,551
|
|
|
Principal payments on notes payable
|
—
|
|
|
—
|
|
|
(1,113)
|
|
|
(81,858)
|
|
|
—
|
|
|
(82,971)
|
|
|
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
|
—
|
|
|
407,446
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
407,446
|
|
|
Payments on Revolver
|
—
|
|
|
(187,446)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(187,446)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred loan costs
|
—
|
|
|
(10,757)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,757)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares remitted to, or withheld by the Company for employee tax withholding
|
—
|
|
|
(4,954)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,954)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments to repurchase common stock
|
—
|
|
|
(11,234)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,234)
|
|
|
Noncontrolling interest contributions
|
—
|
|
|
—
|
|
|
—
|
|
|
126,088
|
|
|
—
|
|
|
126,088
|
|
|
Noncontrolling interest distributions
|
—
|
|
|
—
|
|
|
—
|
|
|
(51,934)
|
|
|
—
|
|
|
(51,934)
|
|
|
Advances to affiliates
|
—
|
|
|
—
|
|
|
(10,856)
|
|
|
27,784
|
|
|
(16,928)
|
|
|
—
|
|
|
Intercompany receivables/payables
|
(8,595)
|
|
|
(500,144)
|
|
|
(11,880)
|
|
|
20,641
|
|
|
499,978
|
|
|
—
|
|
|
Net cash (used in) provided by financing activities
|
(8,595)
|
|
|
(107,089)
|
|
|
(23,615)
|
|
|
192,038
|
|
|
483,050
|
|
|
535,789
|
|
|
Net (decrease) increase in cash and cash equivalents
|
—
|
|
|
(135,345)
|
|
|
768
|
|
|
2,649
|
|
|
—
|
|
|
(131,928)
|
|
|
Cash and cash equivalents - beginning of period
|
—
|
|
|
171,434
|
|
|
156
|
|
|
11,120
|
|
|
—
|
|
|
182,710
|
|
|
Cash and cash equivalents - end of period
|
$
|
—
|
|
|
$
|
36,089
|
|
|
$
|
924
|
|
|
$
|
13,769
|
|
|
$
|
—
|
|
|
$
|
50,782
|
|
Note 9—Financial Services
During the second quarter of 2019, the Company announced the formation of ClosingMark Financial Group, LLC, a wholly-owned subsidiary operating a full suite of financial services offerings, including title agency, settlement and mortgage services, for the Company’s homebuyers and other retail customers, which operates as ClosingMark Home Loans. During the third quarter, the Company completed the integration of its existing mortgage joint venture operations and loan pipeline into this platform, through the Polygon Mortgage Acquisition and the WLM Pipeline Acquisition, under the ClosingMark Home Loans brand (see Note 5 - Investments in Unconsolidated Joint Ventures).
During the second quarter of 2019, the Company established official Financial Services Operations under the brand of ClosingMark Financial Group, LLC. As of September 30, 2019 ClosingMark Financial Group's assets and liabilities we as follows:
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Assets:
|
|
|
Cash
|
$
|
19,047
|
|
|
Derivative portfolio
|
1,123
|
|
|
Mortgages held for sale
|
138,121
|
|
|
Goodwill
|
6,875
|
|
|
Other
|
2,927
|
|
|
Financial Services Assets
|
$
|
168,093
|
|
|
|
|
|
Liabilities:
|
|
|
AP and accrued liabilities
|
$
|
23,010
|
|
|
Warehouse facilities
|
123,826
|
|
|
|
$
|
146,836
|
|
|
|
|
The Company's derivative portfolio consists of pull-through adjusted forward contracts, with a notional value of $92.9 million. Goodwill is comprised of $4.5 million attributed to the SPFC Acquisition (see Note 2) and $2.4 million attributed to the Polygon Mortgage Acquisition (see Note 5).
Financial services net, is comprised of the following activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
September 30,
2019
|
|
Three
Months
Ended
September 30,
2018
|
|
Nine
Months
Ended
September 30,
2019
|
|
Nine
Months
Ended
September 30,
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Title & Escrow
|
$
|
593
|
|
|
$
|
—
|
|
|
$
|
965
|
|
|
$
|
—
|
|
|
Mortgage
|
14,619
|
|
|
—
|
|
|
18,892
|
|
|
—
|
|
|
|
$
|
15,212
|
|
|
$
|
—
|
|
|
$
|
19,857
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Title & Escrow
|
$
|
(699)
|
|
|
$
|
—
|
|
|
$
|
(1,138)
|
|
|
$
|
—
|
|
|
Mortgage
|
(9,695)
|
|
|
—
|
|
|
(14,761)
|
|
|
—
|
|
|
Administrative
|
(1,428)
|
|
|
—
|
|
|
(1,790)
|
|
|
—
|
|
|
|
$
|
(11,822)
|
|
|
$
|
—
|
|
|
$
|
(17,689)
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
3,390
|
|
|
$
|
—
|
|
|
$
|
2,168
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Costs
|
—
|
|
|
—
|
|
|
(990)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of unconsolidated joint ventures
|
353
|
|
|
531
|
|
|
2,643
|
|
|
1,996
|
|
|
|
|
|
|
|
|
|
|
|
Total Financial services income
|
$
|
3,743
|
|
|
$
|
531
|
|
|
$
|
3,821
|
|
|
$
|
1,996
|
|
During the three and nine months ended September 30, 2019, the ClosingMark Home Loans originated loans with a total principal balance of $388.5 million and $870.4 million, respectively.
Note 10—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 September 30, 2019 and December 31, 2018, the Company used the following assumptions to estimate the fair value of each type of financial instrument for which it is practicable to estimate:
•Derivative portfolio-These securities are traded over the counter and their fair values were based upon quotes from industry sources
•Mortgages held for sale-The fair values of Mortgages held for sale are based on the fair value of the collateral less estimated cost to sell or discounted cash flows, if estimable.
•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.
•Warehouse facilities-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.
•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.
•5.875% Senior Notes due January 31, 2025 —The 5.875% Senior Notes are traded over the counter and their fair values were based upon quotes from industry sources.
•6.625% Senior Notes due July 15, 2027 —The 6.625% 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
December 31, 2018
|
|
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Derivative portfolio
|
$
|
1,123
|
|
|
$
|
1,123
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Mortgages held for sale
|
138,121
|
|
|
138,121
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Notes payable
|
$
|
288,981
|
|
|
$
|
288,981
|
|
|
$
|
198,019
|
|
|
$
|
198,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse facilities
|
123,826
|
|
|
123,826
|
|
|
—
|
|
|
—
|
|
|
7% Senior Notes due 2022
|
49,762
|
|
|
50,125
|
|
|
347,456
|
|
|
350,000
|
|
|
6% Senior Notes due 2023
|
344,654
|
|
|
363,125
|
|
|
343,878
|
|
|
315,000
|
|
|
5.875% Senior Notes due 2025
|
429,121
|
|
|
440,731
|
|
|
431,992
|
|
|
378,611
|
|
|
6.625% Senior Notes due 2027
|
294,673
|
|
|
310,500
|
|
|
—
|
|
|
—
|
|
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 Loans held for resale, Notes payable, and Warehouse facilities, and Level 2 to measure the fair value of its Senior notes and Derivative portfolio. 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 11—Related Party Transactions
On March 9, 2018, California Lyon completed its private placement with registration rights of the 6.00% Notes in an aggregate principal amount of $350 million (see Note 8), for which Credit Suisse Securities (USA) LLC (“Credit Suisse”) served as an initial purchaser and joint book-running manager, along with several other banks, and received customary underwriting fees as a member of the underwriting syndicate. On November 5, 2018, Eric A. Anderson commenced his service as a member of the Company's Board of Directors. Mr. Anderson had previously held the position of Vice Chairman, Investment Banking of Credit Suisse until November 3, 2018, at which point, Mr. Anderson was appointed as a Senior Advisor to Credit Suisse, a non-employee role pursuant to which he provides certain consultant services to Credit Suisse as an independent contractor. As of and following the November 3, 2018 transition date, Mr. Anderson did not and will not receive any fees or compensation of any kind for any transactional relationships between Credit Suisse and the Company.
Note 12—Income Taxes
Since inception, the Company has operated solely within the United States. The Company’s effective income tax rate was 21.5% and 22.4% and 22.0% and 21.5% for the three and nine months ended September 30, 2019 and 2018, respectively. The significant drivers of the effective tax rate are allocation of income to noncontrolling interests for the three and nine months September 30, 2019 and September 30, 2018.
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 September 30, 2019, the Company had no valuation allowance recorded.
At September 30, 2019, the Company had no remaining federal net operating loss carryforwards and $46.4 million of remaining state net operating loss carryforwards. State net operating loss carryforwards begin to expire in 2031. In addition, as of September 30, 2019, the Company had unused federal and state built-in losses of $44.9 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 September 30, 2019, which if not previously utilized are allowable as refundable credits under the Tax Cuts and Job Act through 2022.
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 2015 and forward. The Company is subject to various state income tax examinations for calendar tax years ended 2014 and forward. The Company is currently under examination by the state of California for the 2014 tax year.
Note 13—Income Per Common Share
Basic and diluted income per common share for the three and nine months ended September 30, 2019 and 2018 were calculated as follows (in thousands, except number of shares and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
September 30,
2019
|
|
Three
Months
Ended
September 30,
2018
|
|
Nine
Months
Ended
September 30,
2019
|
|
Nine
Months
Ended
September 30,
2018
|
|
Basic weighted average number of common shares outstanding
|
37,836,265
|
|
|
37,847,743
|
|
|
37,755,879
|
|
|
37,931,764
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options, unvested common shares, and warrants
|
1,335,481
|
|
|
1,313,151
|
|
|
1,188,129
|
|
|
1,650,222
|
|
|
|
|
|
|
|
|
|
|
|
Diluted average shares outstanding
|
39,171,746
|
|
|
39,160,894
|
|
|
38,944,008
|
|
|
39,581,986
|
|
|
Net income available to common stockholders
|
$
|
9,480
|
|
|
$
|
26,558
|
|
|
$
|
28,050
|
|
|
$
|
57,341
|
|
|
Basic income per common share
|
$
|
0.25
|
|
|
$
|
0.70
|
|
|
$
|
0.74
|
|
|
$
|
1.51
|
|
|
Dilutive income per common share
|
$
|
0.24
|
|
|
$
|
0.68
|
|
|
$
|
0.72
|
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14—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 nine months ended September 30, 2019, the Company granted 6,257 shares and 557,086 shares of time-based restricted stock, and none and 490,227 of performance stock units, including one award tied to a market performance condition. During the three and nine months ended September 30, 2018, the Company granted 1,065 and 242,638 shares of time-based restricted stock, respectively. During the three and nine months ended September 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 nine months ended September 30, 2019 and 2018 of $2.2 million and $7.0 million and $2.4 million and $7.6 million respectively.
Performance Stock Units
With respect to the performance stock units granted to certain employees during the nine months ended September 30, 2019, the actual number of such stock units that will be earned is subject to the Company’s achievement of performance targets as of the end of the 2019 fiscal year, with each unit constituting the opportunity to earn up to two shares of Company common stock. The aforementioned awards represent 400,460 stock units that vest in three equal annual installments on March 1st of each of 2020, 2021 and 2022, subject to each grantee’s continued service through each vesting date. Based on the probability assessment as of September 30, 2019, 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.
Performance Stock Units with Market Condition
With respect to the performance based stock units with market condition granted to a certain employee during the nine months ended September 30, 2019, the actual number of stock units that will be earned is subject to the Company’s achievement of a pre-established market performance target as of the end of the vesting periods, with each unit constituting the opportunity to earn up to two shares of Company common stock. The aforementioned award represents 89,767 stock units that vest in two annual installments at the end of each performance period, subject to grantee’s continued service through each vesting date.
Time-Based Restricted Stock Awards
With respect to the restricted stock awards granted to certain employees during the nine months ended September 30, 2019, 285,030 of such shares vest in three equal annual installments on each anniversary of the grant date, 134,650 of such shares vest in one installment on January 2, 2022, 6,257 of such shares vest in one installment on August 7, 2021, and 84,156 of such shares vest in two equal annual installments on each anniversary of the grant date, subject to the grantee’s continued service through each vesting date. With respect to the restricted stock awards granted to certain non-employee directors during the nine months ended September 30, 2019, 46,993 of such shares vest in four equal quarterly installments on each three-month period beginning June 1st of 2019, subject to each grantee’s continued service on the board through each vesting date.
Note 15—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 September 30, 2019, 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.
On March 31, 2019, there was a fire in Wilsonville, Oregon in which we incurred damage to certain buildings in our Villebois community. We do not have an estimate yet as to the dollar amount of the damages. As of September 30, 2019, the Company has not recorded any amounts related to the damages incurred in its Consolidated Financial Statements, however the Company expects any and all damages to be paid by insurance less any associated deductibles.
The Company had outstanding performance and surety bonds of $342.9 million at September 30, 2019, 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 September 30, 2019, the Company had $297.9 million of project commitments relating to the construction of projects.
See Note 8 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 September 30, 2019, the Company has made non-refundable deposits of $73.2 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 $0.7 million as of September 30, 2019.
Land Banking Arrangements
The Company enters into purchase agreements with various land sellers. As a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Company’s available cash or other corporate financing sources and limiting the Company’s risk, the Company transfers the Company’s right in such purchase agreements to entities owned by third parties (“land banking arrangements”). These entities use equity contributions and/or incur debt to finance the acquisition and development of the land. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit of 15% to 25% of the total purchase price. The Company is under no obligation to purchase the balance of the lots, but would forfeit any existing deposits and could be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. These land banking arrangements help the Company manage the financial and market risk associated with land
holdings. As discussed above, with exception of the arrangement discussed below, these amounts are included in the total remaining purchase price mentioned above.
Summary information with respect to the Company’s consolidated land banking arrangements is as follows as of the period presented (dollars in thousands):
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September 30, 2019
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Total number of land banking arrangements consolidated
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3
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Total number of lots
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5,184
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Total purchase price
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$
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452,967
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Balance of lots still under option and not purchased:
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Number of lots
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3,435
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Purchase price
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$
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215,541
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Forfeited deposits if lots are not purchased
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$
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55,860
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Lease Obligations
Lease obligations, as included in Accrued expenses on the consolidated balance sheets, were $37.9 million as of September 30, 2019 and $14.6 million as of December 31, 2018. 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. As of September 30, 2019 and December 31, 2018, the Company's operating lease obligations totaled $19.4 million and $14.6 million, respectively. The Company is also party to a non-cancelable finance lease related to the development of a future project. The Company's recorded obligation under this finance lease was $18.5 million at September 30, 2019. The Company is currently capitalizing all lease costs incurred with this finance lease as it is prepared for its intended use. The determination of which discount rate to use when measuring the lease obligation was deemed a significant judgment. Lease cost, as included in general and administrative expense in our consolidated statements of operations for the respective periods, and additional information regarding lease terms are as follows (dollars in thousands):
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Three Months Ended September 30, 2019
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Three Months Ended September 30, 2018
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Nine
Months
Ended
September 30,
2019
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Nine
Months
Ended
September 30,
2018
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Lease cost
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Operating lease cost
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$
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2,165
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$
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2,113
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$
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5,617
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$
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6,166
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Sublease income
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—
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(29)
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—
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(87)
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Finance lease cost capitalized
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427
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—
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1,016
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—
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Total lease cost
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$
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2,592
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$
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2,084
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$
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6,633
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$
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6,079
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Other information
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Cash paid for amounts included in the measurement of lease liabilities for leases:
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Operating cash flows from operating leases
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1,422
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1,779
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3,930
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5,325
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Financing cash flows from finance leases
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$
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56
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$
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—
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$
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1,264
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$
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—
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Right-of-use assets obtained in exchange for new operating lease liabilities
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$
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849
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$
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252
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$
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5,923
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$
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5,640
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Right-of-use assets obtained in exchange for new finance lease liabilities
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$
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—
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$
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—
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$
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18,858
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$
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—
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Weighted-average discount rate
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7.3
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%
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6.5
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%
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7.3
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%
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6.5
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%
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September 30, 2019
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December 31, 2018
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Weighted-average remaining operating lease term (in years)
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4.46
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4.23
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Weighted-average remaining finance lease term (in years)
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89.34
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N/A
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The table below shows the future minimum payments under non-cancelable operating leases at September 30, 2019 (in thousands).
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Year Ending December 31,
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Remaining in 2019
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$
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5,055
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2020
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5,716
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2021
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5,227
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2022
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3,984
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2023
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2,837
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Thereafter
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2,614
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Total
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$
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25,433
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The table below shows the future minimum payments under non-cancelable finance leases at September 30, 2019 (in thousands).
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Year Ending December 31,
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Remaining in 2019
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$
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—
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2020
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1,304
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2021
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1,304
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2022
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1,304
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2023
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1,304
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Thereafter
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120,685
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Total
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$
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125,901
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Note 16—Subsequent Events
No events have occurred subsequent to September 30, 2019, that would require recognition or disclosure in the Company’s financial statements except the following:
Agreement and Plan of Merger
On November 5, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Taylor Morrison Home Corporation, a Delaware corporation (“Taylor Morrison”) and Tower Merger Sub, Inc., a wholly owned, direct subsidiary of Taylor Morrison (“Merger Sub”). Upon the terms and subject to the conditions of the Merger Agreement, the parties have agreed that Acquisition Sub will merge with and into the Company, with the Company surviving the merger as a wholly owned subsidiary of Taylor Morrison (the “Merger”).
Upon the consummation of the Merger, each share of the Company’s Class A Common Stock and Class B Common Stock that is outstanding immediately prior to the effective time of the Merger (other than certain excluded shares as described in the Merger Agreement) will automatically be converted into the right to receive (A) 0.8000 validly issued, fully paid and non-assessable shares of Taylor Morrison common stock, $0.00001 par value per share (the “Stock Consideration”), plus (B) $2.50 in cash, without interest.
The consummation of the Merger is also subject to certain closing conditions, including receipt of the approval of the Merger by the Company’s stockholders and the approval of the issuance of the shares of the Stock Consideration issuable in connection with the Merger by Taylor Morrison’s stockholders, and other customary closing conditions.
The Merger Agreement contains customary representations, warranties and covenants by the Company, Taylor Morrison, and Merger Sub, and it may be terminated by Taylor Morrison or the Company under certain conditions. The Merger Agreement provides that, in connection with the termination of the Merger Agreement under specified circumstances, the Company may be required to pay to Taylor Morrison a termination fee equal to $18,000,000 in cash. The Merger Agreement also provides that, in connection with the termination of the Merger Agreement under specified circumstances, Taylor Morrison may be required to pay to the Company a termination fee equal to $40,000,000 in cash. In addition, the Merger Agreement also provides that, in connection with the termination of the Merger Agreement in connection with the failure to obtain requisite approvals from the stockholders of Taylor Morrison or the Company, Taylor Morrison or the Company, respectively, may be required to reimburse the other party for certain transaction expenses related to the negotiation or consummation of the transactions contemplated by the Merger Agreement, up to certain amounts specified in the Merger Agreement.