Shea Homes Limited Partnership 10-Q 2014 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

OR

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

Commission file number 333-177328

SHEA HOMES LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

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

655 Brea Canyon Road, Walnut, CA 91789	91789-3078
(Address of principal executive offices)	(Zip Code)

(909) 594-9500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

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

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

EXPLANATORY NOTE

The registrant is a voluntary filer and is not subject to the filing requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). Although not subject to these filing requirements, the registrant has filed all Exchange Act reports for the preceding 12 months.

SHEA HOMES LIMITED PARTNERSHIP

FORM 10-Q

INDEX

		Page No.
PART 1. Financial Information
ITEM 1.	Financial Statements
	Condensed Consolidated Balance Sheets at March 31, 2014 (unaudited) and December 31, 2013		1
	Unaudited Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2014 and 2013		2
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2014 and 2013		3
	Unaudited Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2014 and 2013		4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013		5
	Notes to Condensed Consolidated Financial Statements at March 31, 2014 (Unaudited) and December 31, 2013, and for the Three Months Ended March 31, 2014 and 2013 (Unaudited)		6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		44
ITEM 4.	Controls and Procedures		45
PART 2. Other Information
ITEM 1.	Legal Proceedings		46
ITEM 1A.	Risk Factors		46
ITEM 6.	Exhibits		47
SIGNATURES			48

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Balance Sheets

(In thousands)

	March 31, 2014		December 31, 2013
	(unaudited)
Assets
Cash and cash equivalents	$	104,775	$	206,205
Restricted cash		996		1,189
Accounts and other receivables, net		153,845		147,499
Receivables from related parties, net		21,988		32,350
Inventory		1,132,196		1,013,272
Investments in unconsolidated joint ventures		52,535		47,748
Other assets, net		57,112		57,070
Total assets	$	1,523,447	$	1,505,333
Liabilities and equity
Liabilities:
Notes payable	$	752,092	$	751,708
Payables to related parties		5,599		21
Accounts payable		44,605		62,346
Other liabilities		288,551		245,801
Total liabilities		1,090,847		1,059,876
Equity:
SHLP equity:
Owners’ equity		427,235		440,268
Accumulated other comprehensive income		4,967		4,788
Total SHLP equity		432,202		445,056
Non-controlling interests		398		401
Total equity		432,600		445,457
Total liabilities and equity	$	1,523,447	$	1,505,333

See accompanying notes

1

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Income

(In thousands)

	Three Months Ended March 31,
	2014			2013
	(unaudited)			(unaudited)
Revenues	$	180,115		$	134,960
Cost of sales		(135,258	)		(103,424	)
Gross margin		44,857			31,536
Selling expenses		(11,740	)		(10,154	)
General and administrative expenses		(15,304	)		(11,957	)
Equity in income (loss) from unconsolidated joint ventures		406			(632	)
Gain on reinsurance transaction		1,345			648
Interest expense		(118	)		(3,433	)
Other income (expense), net		(473	)		770
Income before income taxes		18,973			6,778
Income tax benefit (expense)		(7,678	)		59
Net income		11,295			6,837
Less: Net loss attributable to non-controlling interests		3			1
Net income attributable to SHLP	$	11,298		$	6,838

See accompanying notes

2

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

	Three Months Ended March 31,
	2014			2013
	(unaudited)			(unaudited)
Net income	$	11,295		$	6,837
Other comprehensive income, before tax
Unrealized investment holding gains during the year		296			250
Less: Reclassification adjustments for investment gains included in net income		0			(37	)
Comprehensive income, before tax		11,591			7,050
Income tax expense		(117	)		(83	)
Comprehensive income, net of tax		11,474			6,967
Less: Comprehensive loss attributable to non-controlling interests		3			1
Comprehensive income attributable to SHLP	$	11,477		$	6,968

See accompanying notes

3

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Changes in Equity

(In thousands)

	Shea Homes Limited Partnership																		Non- controlling Interests			Total Equity
	Limited Partner							General Partner			Total Owners’ Equity			Accumulated Other Comprehensive Income (Loss)		Total SHLP Equity
	Common			Preferred Series B		Preferred Series D		Common
Balance, December 31, 2012	$	1,863		$	173,555	$	138,413	$	490		$	314,321		$	4,517	$	318,838		$	409		$	319,247
Comprehensive income (loss):
Net income (loss)		0			0		6,838		0			6,838			0		6,838			(1	)		6,837
Change in unrealized gains on investments, net		0			0		0		0			0			130		130			0			130
Total comprehensive income (loss)																	6,968			(1	)		6,967
Balance, March 31, 2013 (unaudited)	$	1,863		$	173,555	$	145,251	$	490		$	321,159		$	4,647	$	325,806		$	408		$	326,214
Balance, December 31, 2013	$	35,996		$	216,934	$	177,866	$	9,472		$	440,268		$	4,788	$	445,056		$	401		$	445,457
Comprehensive income:
Net income (loss)		7,772			475		1,006		2,045			11,298			0		11,298			(3	)		11,295
Change in unrealized gains on investments, net		0			0		0		0			0			179		179			0			179
Total comprehensive income																	11,477			(3	)		11,474
Contributions from owners(a)		748			0		0		197			945			0		945			0			945
Distributions to owners (b)		(20,010	)		0		0		(5,266	)		(25,276	)		0		(25,276	)		0			(25,276	)
Balance, March 31, 2014 (unaudited)	$	24,506		$	217,409	$	178,872	$	6,448		$	427,235		$	4,967	$	432,202		$	398		$	432,600

(a) In February 2014, the Company sold property to a related party under common control and, in accordance with GAAP, $0.9 million of consideration received in excess of the net book value was recorded as an equity contribution from its owners.

(b) In January 2014, the Company acquired property from a related party under common control for $4.4 million cash, assumption of a $1.3 million liability, and estimated future revenue participation payments of $19.6 million. The $25.3 million of consideration was recorded as an equity distribution to its owners.

See accompanying notes

4

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Cash Flows

(In thousands)

	Three Months Ended March 31,
	2014			2013
	(unaudited)			(unaudited)
Operating activities
Net income	$	11,295		$	6,837
Adjustments to reconcile net income to net cash used in operating activities:
Equity in (income) loss from unconsolidated joint ventures		(406	)		632
Gain on reinsurance transaction		(1,345	)		(648	)
Net gain on sale of available-for-sale investments		0			(10	)
Depreciation and amortization expense		1,923			1,759
Net interest capitalized on investment in joint ventures		(875	)		(257	)
Distributions of earnings from joint ventures		1,130			0
Changes in operating assets and liabilities:
Restricted cash		193			10,343
Receivables and other assets		(6,395	)		(4,755	)
Inventory		(118,924	)		(44,743	)
Payables and other liabilities		10,742			2,879
Net cash used in operating activities		(102,662	)		(27,963	)
Investing activities
Proceeds from sale of available-for-sale investments		86			3,069
Net collections on promissory notes from related parties		10,461			385
Investments in unconsolidated joint ventures		(4,452	)		(4,028	)
Distributions from unconsolidated joint ventures		0			500
Net cash provided by (used in) investing activities		6,095			(74	)
Financing activities
Principal payments to financial institutions and others		(1,423	)		(241	)
Contributions from owners		945			0
Distributions to owners		(4,385	)		0
Net cash used in financing activities		(4,863	)		(241	)
Net decrease in cash and cash equivalents		(101,430	)		(28,278	)
Cash and cash equivalents at beginning of period		206,205			279,756
Cash and cash equivalents at end of period	$	104,775		$	251,478

See accompanying notes

5

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2014

1. Basis of Presentation

The accompanying unaudited, condensed consolidated financial statements include the accounts of Shea Homes Limited Partnership (“SHLP”) and its wholly-owned subsidiaries, including Shea Homes, Inc. (“SHI”) and its wholly-owned subsidiaries. The Company consolidates all joint ventures in which it has a controlling interest or other ventures in which it is the primary beneficiary of a variable interest entity (“VIE”). Material intercompany accounts and transactions are eliminated. The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all information and notes required by GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended December 31, 2013. Adjustments, consisting of normal, recurring accruals and loss reserves, considered necessary for a fair presentation, are included.

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

Organization

SHLP, a California limited partnership, was formed January 4, 1989, pursuant to an agreement of partnership (the “Agreement”), as most recently amended August 6, 2013, by and between J.F. Shea, G.P., a Delaware general partnership, as general partner, and the Company’s limited partners who are comprised of entities and trusts, including J.F. Shea Co., Inc. (“JFSCI”), that are under the common control of Shea family members (collectively, the “Partners”). J.F. Shea, G.P. is 96% owned by JFSCI.

Nature of Operations

Our principal business purpose is homebuilding, which includes acquiring and developing land and constructing and selling new residential homes thereon. To a lesser degree, we develop lots and sell them to other homebuilders. Our principal markets are California, Arizona, Colorado, Washington, Nevada, Florida, Virginia and Texas.

We own a captive insurance company, Partners Insurance Company, Inc. (“PIC”), which provided warranty, general liability, workers’ compensation and completed operations insurance for related companies and third-party subcontractors. Effective for the policy years commencing in 2007, PIC ceased issuing policies for these coverages (see Note 11).

Seasonality

Historically, the homebuilding industry experiences seasonal fluctuations. We typically experience the highest home sales order activity in spring and summer, although this activity is also highly dependent on the number of active selling communities, timing of community openings and other market factors. Since it typically takes three to eight months to construct a home, we close more homes in the second half of the year as spring and summer home sales orders convert to home closings. Because of this seasonality, home starts, construction costs and related cash outflows are historically highest from April to October, and the majority of cash receipts from home closings occur during the second half of the year. Therefore, operating results for the three months ended March 31, 2014 are not necessarily indicative of results expected for the year ended December 31, 2014.

Use of Estimates

Preparation of the consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates primarily relate to valuation of certain real estate and reserves for self-insured risks. Actual results could differ significantly from those estimates.

6

2. Summary of Significant Accounting Policies

Inventory

We capitalize preacquisition, land, development and other allocated costs, including interest during development and home construction. Applicable costs incurred after development or construction is substantially complete are charged to selling, general and administrative, and other expenses as appropriate. Preacquisition costs, including non-refundable land deposits, are expensed to other income (expense), net when we determine continuation of the respective project is not probable.

Land, development and other indirect costs are typically allocated to inventory using a methodology that approximates the relative-sales-value method. Home construction costs are recorded using the specific identification method. Cost of sales for homes closed includes the specific construction costs of each home and all applicable land acquisition, land development and related costs (both incurred and estimated to be incurred) based upon the total number of homes expected to close in each community. Changes to estimated total development costs subsequent to initial home closings in a community are generally allocated on a relative-sales-value method to remaining homes in the community.

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

If there are indications of impairment, we analyze the budgets and cash flows of our real estate assets and compare the estimated remaining undiscounted future cash flows of the community to the asset’s carrying value. If the undiscounted cash flows exceed the asset’s carrying value, no impairment adjustment is required. If the undiscounted cash flows are less than the asset’s carrying value, the asset is deemed impaired and adjusted to fair value. For land held for sale, if the fair value less costs to sell exceed the asset’s carrying value, no impairment adjustment is required. These impairment evaluations require use of estimates and assumptions regarding future conditions, including timing and amounts of development costs and sales prices of real estate assets, to determine if estimated future undiscounted cash flows will be sufficient to recover the asset’s carrying value.

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

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

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

Completed Operations Claim Costs

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

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

7

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

The actuarial analyses that determine these incurred but not reported claims consider various factors, including frequency and severity of losses, which are based on our historical claims experience supplemented by industry data. The actuarial analyses of these claims and reserves also consider historical third party recovery rates and claims management expenses. Due to inherent uncertainties related to each of these factors, periodic changes to such factors based on updated relevant information could result in actual costs differing significantly from estimates.

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

Revenues

In accordance with Accounting Standards Codification (“ASC”) 360, revenues from housing and other real estate sales are recognized when the respective units close. Housing and other real estate sales close when all conditions of escrow are met, including delivery of the home or other real estate asset, title passage, appropriate consideration is received or collection of associated receivables, if any, is reasonably assured and when we have no other continuing involvement in the asset. Sales incentives are a reduction of revenues when the respective unit is closed.

Income Taxes

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

SHI and PIC are C corporations. Federal and state income taxes are provided for these entities in accordance with ASC 740. The provision for, or benefit from, income taxes is calculated using the asset and liability method, whereby deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect the year in which differences are expected to reverse.

Deferred tax assets are evaluated to determine whether a valuation allowance should be established based on our determination of whether it is more likely than not some or all of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends primarily on generation of future taxable income during periods in which those temporary differences become deductible. The assessment of a valuation allowance includes giving appropriate consideration to all positive and negative evidence related to the realization of the deferred tax asset. This assessment considers, among other things, the nature, frequency and severity of current and cumulative losses over recent years, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards before they expire, and tax planning alternatives. Judgment is required in determining future tax consequences of events that have been recognized in the consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial position or results of operations.

We follow certain accounting guidance with respect to how uncertain tax positions should be accounted for and disclosed in the consolidated financial statements. The guidance requires the assessment of tax positions taken or expected to be taken in the tax returns and to determine whether the tax positions are “more-likely-than-not” of being sustained upon examination by the applicable tax authority. Tax positions deemed to meet the more-likely-than-not criteria would be recorded as a tax benefit or expense in the current year. We are required to assess open tax years, as defined by the statute of limitations, for all major jurisdictions, including federal and certain states. Open tax years are those that are open for examination by taxing authorities. We have examinations in progress but believe there are no uncertain tax positions that do not meet the more-likely-than-not level of authority (see Note 13).

3. Restricted Cash

At March 31, 2014 and December 31, 2013, restricted cash included cash customer deposits temporarily restricted in accordance with regulatory requirements and cash used in lieu of bonds. At March 31, 2014 and December 31, 2013, restricted cash was $1.0 million and $1.2 million, respectively.

8

4. Fair Value Disclosures

At March 31, 2014 and December 31, 2013, as required by ASC 825, the following presents net book values and estimated fair values of notes payable.

	March 31, 2014				December 31, 2013
	Net Book Value		Estimated Fair Value		Net Book Value		Estimated Fair Value
	(In thousands)
$750,000 senior secured notes	$	750,000	$	825,000	$	750,000	$	830,625
Secured promissory notes	$	2,092	$	2,092	$	1,708	$	1,708

The $750.0 million 8.625% senior secured notes due May 2019 (the “Secured Notes”) are level 2 financial instruments in which fair value was based on quoted market prices in an inactive market at the end of the period.

Other financial instruments consist primarily of cash and cash equivalents, restricted cash, accounts and other receivables, accounts payable and other liabilities and secured promissory notes. Book values of these financial instruments approximate fair value due to their relatively short-term nature. In addition, included in other assets are available-for-sale marketable securities, which are recorded at fair value.

5. Accounts and Other Receivables, net

At March 31, 2014 and December 31, 2013, accounts and other receivables, net were as follows:

	March 31, 2014			December 31, 2013
	(In thousands)
Insurance receivables	$	137,644		$	138,610
Escrow receivables		7,154			586
Notes receivables		4,308			3,155
Development receivables		1,932			3,093
Other receivables		4,718			4,031
Reserve		(1,911	)		(1,976	)
Total accounts and other receivables, net	$	153,845		$	147,499

Insurance receivables are from insurance carriers for reimbursable claims pertaining to resultant damage from construction defects on closed homes (see Note 11). Closed homes for policy years August 1, 2001 to July 31, 2009 are insured or reinsured with third-party insurance carriers, and closed homes for policy years commencing August 1, 2009 are insured with third-party and affiliate insurance carriers. At March 31, 2014 and December 31, 2013, insurance receivables from affiliate insurance carriers were $47.2 million and $44.0 million, respectively.

We reserve for uncollectible receivables that are specifically identified.

6. Inventory

At March 31, 2014 and December 31, 2013, inventory was as follows:

	March 31, 2014		December 31, 2013
	(In thousands)
Model homes	$	104,549	$	87,728
Completed homes for sale		34,237		20,285
Homes under construction		299,579		257,662
Lots available for construction		354,471		342,622
Land under development		154,801		122,257
Land held for future development		80,413		70,618
Land held for sale, including water system connection rights		82,595		79,102
Land deposits and preacquisition costs		21,551		32,998
Total inventory	$	1,132,196	$	1,013,272

9

Model homes, completed homes for sale and homes under construction include all costs associated with home construction, including land, development, indirects, permits, and vertical construction. Lots available for construction include costs incurred prior to home construction such as land, development, indirects and permits. Land under development includes costs incurred during site development such as land, development, indirects and permits. Land under development transfers to lots available for construction once site development is complete and is ready for vertical construction. Land is classified as held for future development if no significant development has occurred. Land held for sale, including water system connection rights, represents residential and commercial land designated for sale, as well as water system connection rights held that will be transferred to homebuyers upon closing of their home, transferred upon sale of land to the respective buyer, sold or otherwise leased.

Impairment

Inventory, including the captions above, are stated at cost, unless the carrying amount is determined to be unrecoverable, in which case inventories are adjusted to fair value or fair value less costs to sell (see Note 2).

For the three months ended March 31, 2014 and 2013, there were no inventory impairment charges.

Interest Capitalization

Interest is capitalized to inventory and investments in unconsolidated joint ventures during development and other qualifying activities. Interest capitalized as a cost of inventory is included in cost of sales when related units close. Interest capitalized to investments in unconsolidated joint ventures is included in equity in income (loss) from unconsolidated joint ventures when related units in the joint ventures close.

For the three months ended March 31, 2014 and 2013, interest incurred, capitalized and expensed was as follows:

	Three Months Ended March 31,
	2014			2013
	(In thousands)
Interest incurred	$	16,929		$	16,768
Interest expensed(a)	$	118		$	3,433
Interest capitalized as a cost of inventory during the period	$	15,936		$	13,078
Interest previously capitalized as a cost of inventory, included in cost of sales	$	(10,844	)	$	(9,511	)
Interest capitalized in ending inventory(b)	$	107,192		$	106,416
Interest capitalized as a cost of investments in unconsolidated joint ventures during the period	$	875		$	257
Interest previously capitalized as a cost of investments in unconsolidated joint ventures, included in equity in income (loss) from unconsolidated joint ventures	$	(267	)	$	(257	)
Interest capitalized in ending investments in unconsolidated joint ventures	$	1,697		$	0

(a) For the three-months ended March 31, 2014, qualifying assets exceeded debt, therefore no interest on the Secured Notes was expensed; interest expense represents fees charged on the unused revolving credit facility that is not considered a cost of borrowing and is not capitalized. For the three months ended March 31, 2013, assets qualifying for interest capitalization were less than debt; therefore, non-qualifying interest was expensed.

(b) Inventory impairment charges were recorded against total inventory of the respective community in prior periods. Capitalized interest reflects the gross amount of capitalized interest as impairment charges recognized were generally not allocated to specific components of inventory.

7. Investments in Unconsolidated Joint Ventures

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

10

Losses and distributions from joint ventures in excess of the carrying amount of our investment (“Deficit Distributions”) are included in other liabilities. We record Deficit Distributions since we are liable for this deficit to respective joint ventures. Deficit Distributions are offset by future earnings of, or future contributions to, the joint ventures. At March 31, 2014 and December 31, 2013, Deficit Distributions were $0.5 million and $0.4 million, respectively.

For the three months ended March 31, 2014 and 2013, there were no impairments on investments in unconsolidated joint ventures.

At March 31, 2014 and December 31, 2013, total unconsolidated joint ventures’ notes payable was as follows:

	March 31, 2014		December 31, 2013
	(In thousands)
Bank and seller notes payable:
Guaranteed (subject to remargin obligations)	$	49,663	$	52,515
Non-Guaranteed		11,010		10,073
Total bank and seller notes payable(a)		60,673		62,588
Partner notes payable(b):
Unsecured		15,844		16,001
Total unconsolidated joint venture notes payable	$	76,517	$	78,589
Other unconsolidated joint venture notes payable(c)	$	12,051	$	55,441

(a) All bank seller notes were secured by real property.

(b) No guarantees were provided on partner notes payable. In January 2014, a $3.2 million partner note from one joint venture was paid off.

(c) Through indirect effective ownership in two joint ventures of 12.3% and 0.0003%, respectively, that had bank notes payable secured by real property in which we have not provided any guarantee.

At March 31, 2014 and December 31, 2013, remargin obligations and guarantees provided on debt of our unconsolidated joint ventures were on a joint and/or several basis and include, but are not limited to, project completion, interest and carry, and loan-to-value maintenance guarantees.

For a joint venture, RRWS, LLC (“RRWS”), we have a remargin obligation that is limited to the lesser of 50% of the outstanding balance or $35.0 million in total for all of the joint venture loans, which outstanding loan balances at March 31, 2014 and December 31, 2013 were $42.2 million and $47.7 million, respectively. Consequently, our maximum remargin obligation at March 31, 2014 and December 31, 2013 was $21.1 million and $23.8 million, respectively. We also have an indemnification agreement where we could potentially recover a portion of any remargin payments made by the Company. However, we cannot provide assurance we could collect under this indemnity agreement.

For a second joint venture, Polo Estates Ventures, LLC (“Polo”), we have a joint and several remargin guarantee on loan obligations which, in total, at March 31, 2014 and December 31, 2013, were $7.4 million and $4.8 million, respectively. At both March 31, 2014 and December 31, 2013, total maximum borrowings permitted on these loans was $21.6 million. We also have reimbursement rights where we could potentially recover a portion of any remargin payments made by the Company. However, we cannot provide assurance we could collect such reimbursements.

No liabilities were recorded for these guarantees at March 31, 2014 and December 31, 2013 as the fair value of the secured real estate assets exceeded the threshold at which a remargin payment would be required.

Our ability to make joint venture and other restricted payments and investments is governed by the Indenture governing the Secured Notes (the “Indenture”). We are permitted to make restricted payments under (i) a $70.0 million revolving basket available solely for joint venture investments and (ii) a broader restricted payment basket available as long as our Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) is at least 2.0 to 1.0. The aggregate amount of restricted payments made under this broader restricted payment basket cannot exceed 50% of our cumulative Consolidated Net Income (as defined in the Indenture) generated from and including October 1, 2013, plus the aggregate net cash proceeds of, and the fair market value of, any property or other asset received by the Company as a capital contribution or upon the issuance of indebtedness or certain securities by the Company from and including October 1, 2013, plus, to the extent not included in Consolidated Net Income, certain amounts received in connection with dispositions, distributions or repayments of restricted investments, plus the value of any unrestricted subsidiary which is redesignated as a restricted subsidiary under the Indenture. We have joint ventures which have used, and are expected to use, capacity under these restricted payment baskets. In 2013, we entered into a joint venture in Southern California and committed to contribute up to $45.0 million of capital. At March 31, 2014 and December 31, 2013, we made aggregate capital contributions of $15.1 million and $15.1 million, respectively, to this joint venture.

11

8. Variable Interest Entities

ASC 810 requires a VIE to be consolidated in the financial statements of a company if it is the primary beneficiary of the VIE. Accordingly, the primary beneficiary has the power to direct activities of the VIE that most significantly impact the VIE’s economic performance, and the obligation to absorb its losses or the right to receive its benefits. All VIEs with which we were involved at March 31, 2014 and December 31, 2013 were evaluated to determine the primary beneficiary.

Joint Ventures

We enter into joint ventures for homebuilding and land development activities. Investments in these joint ventures may create a variable interest in a VIE, depending on contractual terms of the venture. We analyze our joint ventures in accordance with ASC 810 to determine whether they are VIEs and, if so, whether we are the primary beneficiary. At March 31, 2014 and December 31, 2013, these joint ventures were not consolidated in our consolidated financial statements since they were not VIEs, or if they were VIEs, we were not the primary beneficiary.

At March 31, 2014 and December 31, 2013, we had a variable interest in an unconsolidated joint venture determined to be a VIE. The joint venture, RRWS, was formed in December 2012 and is owned 50% by the Company and 50% by a third-party real estate developer (the “RRWS Partner”). Several acquisition, development and construction loans were entered into by RRWS, each with two-year terms and options to extend for one year, subject to certain conditions. Each loan is cross collateralized and cross defaulted with the other loan. The Company and RRWS Partner each executed limited completion, interest and carry guarantees and environmental indemnities on a joint and several basis. In addition, the Company and RRWS Partner executed loan-to-value maintenance agreements for each loan on a joint and several basis. The Company has a maximum aggregate liability under the re-margin arrangements of the lesser of 50% of the outstanding balances or $35.0 million in total. Obligations of the Company and RRWS Partner under the re-margin arrangements are limited during the first two years of the loans. In addition to re-margin arrangements, the RRWS Partner, and several of its principals, executed repayment guarantees with no limit on their liability. At March 31, 2014 and December 31, 2013, outstanding bank notes payable were $42.2 million and $47.7 million, respectively, of which the Company has a maximum remargin obligation of $21.1 million and $23.8 million, respectively. The Company also has an indemnification agreement from the Partner, under which the Company could potentially recover a portion of any remargin payments made by the Company. However, the Company cannot provide assurance it could collect under this indemnity agreement.

At March 31, 2014 and December 31, 2013, we had a variable interest in a second unconsolidated joint venture determined to be a VIE. The joint venture, Polo, was formed in November 2012 and is owned 50% by the Company and 50% by a third-party investor (“Polo Partner”). Polo entered into acquisition, development and construction loans in July 2013 with two-year terms and options to extend for one year, subject to certain conditions. Each loan is cross collateralized and cross defaulted with the other loan. The Company and Polo Partner each executed loan-to-value maintenance arrangements for each loan on a joint and several basis. At March 31, 2014 and December 31, 2013, outstanding bank notes payable were $7.4 million and $4.8 million, respectively, and total maximum borrowings permitted on these loans were $21.6 million and $21.6 million, respectively. The Company also has reimbursement rights where the Company could potentially recover a portion of any remargin payments made by the Company. However, the Company cannot provide assurance it could collect such reimbursements.

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

Land Option Contracts

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

In accordance with ASC 810, we analyzed our land option and similar contracts to determine if respective land sellers are VIEs and, if so, if we are the primary beneficiary. Although we do not have legal title to the optioned land, ASC 810 requires us to consolidate a VIE if we are the primary beneficiary. At March 31, 2014 and December 31, 2013, we determined we were not the primary beneficiary of such VIEs because we did not have the power to direct activities of the VIE that most significantly impact the VIE’s economic performance, such as selling, transferring or developing land owned by the VIE.

12

At March 31, 2014, we had $1.1 million of refundable and non-refundable cash deposits associated with land option contracts with unconsolidated VIEs, having a $29.8 million remaining purchase price. We also had $18.6 million of refundable andnon-refundable cash deposits associated with land option contracts that were not with VIEs, having a $342.8 million remaining purchase price.

Our loss exposure on land option contracts consists of non-refundable deposits, which were $19.0 million and $6.9 million at March 31, 2014 and December 31, 2013, respectively, and capitalized preacquisition costs of $1.9 million and $12.0 million, respectively, which were included in inventory in the consolidated balance sheets.

9. Other Assets, Net

At March 31, 2014 and December 31, 2013, other assets were as follows:

	March 31, 2014		December 31, 2013
	(In thousands)
Income tax receivable	$	0	$	2,199
Deferred tax asset (see Note 13)		15,898		16,337
Investments		9,648		9,439
Property and equipment, net		4,476		4,103
Capitalized loan origination fees		8,152		11,089
Prepaid bank fees		38		152
Deposits in lieu of bonds and letters of credit		10,815		10,294
Prepaid insurance		3,549		2,460
Other		4,536		997
Total other assets, net	$	57,112	$	57,070

Investments

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

For the three months ended March 31, 2014 and 2013, there were no realized gains on available-for-sale securities.

Capitalized Loan Origination Fees

In accordance with ASC 470, loan origination fees are capitalized and amortized as interest over the term of the related debt.

Deposits in Lieu of Bonds and Letters of Credit

We make cash deposits in lieu of bonds with various agencies for some homebuilding projects. These deposits may be returned as the collateral requirements decrease or replaced with new bonds.

10. Notes Payable

At March 31, 2014 and December 31, 2013, notes payable were as follows:

	March 31, 2014		December 31, 2013
	(In thousands)
$750.0 million 8.625% senior secured notes (the “Secured Notes”), due May 2019	$	750,000	$	750,000
$125.0 million secured revolving credit facility (the “Revolver”), interest currently at the Eurodollar rate plus 2.75%, matures March 1, 2016		0		0
Promissory notes, interest ranging from 1% to 6%, maturing through 2014, secured by deeds of trust on inventory		2,092		1,708
Total notes payable	$	752,092	$	751,708

On May 10, 2011, our Secured Notes were issued at $750.0 million, bear interest at 8.625% paid semi-annually on May 15 and November 15, and do not require principal payments until maturity on May 15, 2019. The Secured Notes are redeemable, in whole or

13

in part, at the Company’s option beginning on May 15, 2015 at a price of 104.313 per bond, reducing to 102.156 on May 15, 2016 and are redeemable at par beginning on May 15, 2017. At March 31, 2014 and December 31, 2013, accrued interest was $24.3 million and $8.1 million, respectively.

The indenture governing the Secured Notes contains covenants that limit, among other things, our ability to incur additional indebtedness (including the issuance of certain preferred stock), pay dividends and distributions on our equity interests, repurchase our equity interests, retire unsecured or subordinated notes more than one year prior to their maturity, make investments in subsidiaries and joint ventures that are not restricted subsidiaries that guarantee the Secured Notes, sell certain assets, incur liens, merge with or into other companies, expand unto unrelated businesses, and enter in certain transaction with our affiliates. At March 31, 2014 and December 31, 2013, we were in compliance with these covenants.

In February 2014, the Company replaced its $75.0 million letter of credit facility with the Revolver, which bears interest, at the Company’s option, either at (i) a daily eurocurrency base rate as defined in the credit agreement governing the Revolver (the “Credit Agreement”), plus a margin of 2.75%, or (ii) a eurocurrency rate as defined in the Credit Agreement, plus a margin of 2.75%, and matures March 1, 2016. Borrowing availability is determined by a borrowing base formula and the Company is subject to financial covenants, including minimum net worth and leverage and interest coverage ratios. If the Company does not maintain compliance with these financial covenants, the Revolver converts to an 18-month amortizing term loan. At March 31, 2014, we were in compliance with these covenants.

11. Other Liabilities

At March 31, 2014 and December 31, 2013, other liabilities were as follows:

	March 31, 2014		December 31, 2013
	(In thousands)
Completed operations	$	137,644	$	138,610
Warranty reserves		21,181		20,648
Income tax payable		3,942		0
Accrued profit and revenue participation arrangements (see Note 12)		21,124		678
Deferred revenue/gain		28,182		29,358
Provisions for closed homes/communities		9,322		10,591
Deposits (primarily homebuyer)		17,034		14,281
Legal reserves		4,748		4,576
Accrued interest		24,258		8,086
Accrued compensation and benefits		9,902		9,389
Distributions payable		2,441		2,531
Deficit Distributions (see Note 7)		536		351
Other		8,237		6,702
Total other liabilities	$	288,551	$	245,801

Completed Operations

Reserves for completed operations primarily represent claims for property damage to completed homes and projects outside of our one-to-two year warranty period. Specific terms and conditions of completed operations claims vary depending on the market in which homes close and can range to 12 years from the close of a home. Expenses and liabilities are recorded for potential completed operations claims based upon aggregated loss experience, which includes an estimate of completed operations claims incurred but not reported, and is actuarially estimated using individual case-based valuations and statistical analysis. For policy years from August 1, 2001 through the present, completed operations claims are insured or reinsured through a combination of third-party and affiliate insurance carriers.

14

For the three months ended March 31, 2014 and 2013, changes in completed operations reserves were as follows:

	Three Months Ended March 31,
	2014			2013
	(In thousands)
Balance, beginning of the period	$	138,610		$	131,519
Reserves provided		3,413			1,972
Claims paid		(4,379	)		(2,241	)
Balance, end of the period	$	137,644		$	131,250

Reserves provided for completed operations are generally fully offset by changes in insurance receivables (see Note 5); however, premiums paid for completed operations insurance policies are included in cost of sales. For actual completed operations claims and estimates of completed operations claims incurred but not reported, we estimate and record corresponding insurance receivables under applicable policies when recovery is probable. At March 31, 2014 and December 31, 2013, insurance receivables were $137.6 million and $138.6 million, respectively.

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

Warranty Reserve

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

For the three months ended March 31, 2014 and 2013, changes in warranty liability were as follows:

	Three Months Ended March 31,
	2014			2013
	(In thousands)
Balance, beginning of the period	$	20,648		$	17,749
Provision for warranties		3,309			1,745
Warranty costs paid		(2,776	)		(1,567	)
Balance, end of the period	$	21,181		$	17,927

Deferred Revenue/Gain

Deferred revenue/gain represents deferred revenues or profit on transactions in which an insufficient down payment was received or a future performance, passage of time or event is required. At March 31, 2014 and December 31, 2013, deferred revenue/gain primarily represents the PIC Transaction described below.

Completed operations claims were insured through PIC for policy years August 1, 2001 to July 31, 2007. In December 2009, PIC entered into a series of novation and reinsurance transactions (the “PIC Transaction”).

First, PIC entered into a novation agreement with JFSCI to novate its deductible reimbursement obligations related to its workers’ compensation and general liability risks at September 30, 2009 for policy years August 1, 2001 to July 31, 2007, and its completed operations risks from August 1, 2005 to July 31, 2007. Concurrently, JFSCI entered into insurance arrangements with unrelated third party insurance carriers to insure these policies. As a result of this novation, a $19.2 million gain was deferred and will be recognized as income when related claims are paid. In addition, the deferred gain may increase or decrease based on changes in actuarial estimates. Changes to the deferred gain are recognized as current period income or expense. At March 31, 2014 and December 31, 2013, the unamortized deferred gain was $18.7 million and $18.9 million, respectively. For the three months ended March 31, 2014 and 2013, we recognized $0.2 million and $0.2 million, respectively, of this deferral as income, which was included in gain on reinsurance transaction, and represents the impact of income recognized from claims paid.

15

Second, PIC entered into reinsurance agreements with various unrelated reinsurers that reinsured 100% of its expected completed operations risks from August 1, 2001 to July 31, 2005. As a result of the reinsurance, a $15.6 million gain was deferred and will be recognized as income when the related claims are paid. In addition, the deferred gain may increase or decrease based on changes in actuarial estimates. Changes to the deferred gain are recognized as current period income or expense. At March 31, 2014 and December 31, 2013, the unamortized deferred gain was $6.6 million and $7.8 million, respectively. For the three months ended March 31, 2014 and 2013, we recognized $1.1 million and $0.4 million, respectively, of this deferral as income, which was included in gain on reinsurance transaction, and represents the impact of income recognized from claims paid.

As a result of the PIC Transaction, if the estimated ultimate loss to be paid under these policies exceeds the policy limits under the novation and reinsurance transactions, the shortfall is expected to be funded by JFSCI for the policies novated to JFSCI and by PIC for the policies it reinsured.

Distributions Payable

In December 2011, our consolidated joint venture, Vistancia, LLC, sold its remaining interest in an unconsolidated joint venture (the “Vistancia Sale”). As a result of the Vistancia Sale, no other assets of Vistancia, LLC economically benefit the formernon-controlling member of Vistancia, LLC and the Company recorded the remaining $3.3 million distribution payable to this member, which is paid $0.1 million quarterly. At March 31, 2014 and December 31, 2013, the remaining distribution payable was $2.4 million and $2.5 million, respectively.

12. Related Party Transactions

Related Party Receivables and Payables

At March 31, 2014 and December 31, 2013, receivables from related parties, net were as follows:

	March 31, 2014			December 31, 2013
	(In thousands)
Note receivable from JFSCI	$	13,378		$	21,588
Notes receivable from unconsolidated joint ventures		1,370			1,037
Notes receivable from related parties		16,256			18,822
Reserves for note receivables from related parties		(12,860	)		(12,842	)
Receivables from related parties		3,844			3,745
Total receivables from related parties, net	$	21,988		$	32,350

In May 2011, concurrent with issuance of the Secured Notes, the previous unsecured receivable from JFSCI was partially paid down and the balance converted to a $38.9 million unsecured term note receivable, bearing 4% interest, payable in equal quarterly installments and maturing May 15, 2019. In 2014 and 2013, JFSCI elected to make prepayments, including accrued interest, of $8.4 million and $3.8 million, respectively, and applied these prepayments to future installments such that JFSCI would not be required to make a payment until November 2016. At March 31, 2014 and December 31, 2013, the note receivable from JFSCI, including accrued interest, was $13.4 million and $21.6 million, respectively. Quarterly, we evaluate collectability of the note receivable from JFSCI, which includes consideration of JFSCI’s payment history, operating performance and future payment requirements under the note. Based on these criteria, and as JFSCI applied prepayments under the note to defer future installments until November 2016, we do not anticipate collection risks on the note receivable from JFSCI.

At March 31, 2014 and December 31, 2013, notes receivable from unconsolidated joint ventures, including accrued interest, were $1.4 million and $1.0 million, respectively. These notes receivable bear interest ranging from 8% to 12% and mature in 2020. Further, the note bearing 8% interest can earn additional interest to achieve a 17.5% internal rate of return, subject to available cash flows of the joint venture, and can be repaid prior to 2020. Quarterly, we evaluate collectability of these notes receivable, which includes consideration of prior payment history, operating performance and future payment requirements under the applicable note receivable. Based on these criteria, we do not anticipate collection risks on these notes receivable.

At March 31, 2014 and December 31, 2013, notes receivable from other related parties, including accrued interest, were $3.4 million and $6.0 million, respectively, net of related reserves of $12.9 million and $12.8 million, respectively. These notes are unsecured and mature from August 2016 through April 2021. At March 31, 2014 and December 31, 2013, these notes bore interest ranging from Prime less .75% (2.5%) to Prime plus 1% (4.25%). Quarterly, we evaluate collectability of these notes which includes consideration of prior payment history, operating performance and future payment requirements under the applicable notes. Based on these criteria, two notes receivable were deemed uncollectible and fully reserved. We do not anticipate collection risks on the other notes.

16

The Company, entities under common control and certain unconsolidated joint ventures also engage in transactions on behalf of the other, such as payment of invoices and payroll. Amounts resulting from these transactions are recorded in receivables from related parties or payables to related parties, are non-interest bearing, due on demand and generally paid monthly. At March 31, 2014 and December 31, 2013, these receivables were $3.8 million and $3.7 million, respectively, and these payables were $5.6 million and $0.1 million, respectively.

Real Property and Joint Venture Transactions

In January 2014, the Company entered into a purchase and sale agreement and acquired undeveloped land in Northern California. Consideration includes $4.4 million cash, assumption of a $1.3 million liability, and future revenue participation payments (the “RAPA”). The RAPA is calculated at 11% of gross revenues from home closings, payable quarterly and capped at $19.6 million. The RAPA liability, based on a third-party real estate appraisal, is estimated to be $19.6 million, which is included in other liabilities (see Note 11). As the transaction is with a related party under common control, the $25.3 million of consideration was recorded as an equity distribution to its owners.

In February 2014, the Company entered into a purchase and sale agreement to sell land in Southern California for $1.0 million to a related party under common control. The $0.9 million of net sales proceeds received in excess of the net book value of the land sold was recorded as an equity contribution.

At March 31, 2014 and 2013, we were the managing member for ten and nine, respectively, unconsolidated joint ventures and received management fees from these joint ventures as reimbursement for direct and overhead costs incurred on behalf of the joint ventures and other associated costs. Fees representing cost reimbursement are recorded as an offset to general and administrative expenses; fees in excess of costs are recorded as revenues. For the three months ended March 31, 2014, $2.1 million of management fees were offset to general and administrative expenses, and $0.3 million of management fees were included in revenues. For the three months ended March 31, 2013, $1.6 million of management fees were offset to general and administrative expenses, and $0.1 million of management fees were included in revenues.

Other Related Party Transactions

JFSCI provides corporate services to us, including management, legal, tax, information technology, risk management, facilities, accounting, treasury and human resources. For the three months ended March 31, 2014 and 2013, general and administrative expenses included $6.3 million and $5.2 million, respectively, for corporate services provided by JFSCI.

We lease office space from related parties under non-cancelable operating leases with terms up to ten years that generally provide renewal options for terms up to an additional five years. For the three months ended March 31, 2014 and 2013, related party rental expense was $0.2 million and $0.1 million, respectively.

We obtain workers compensation insurance, commercial general liability insurance and insurance for completed operations losses and damages with respect to our homebuilding operations from affiliate and unrelated third party insurance providers. Some of these policies are purchased by affiliate entities and we pay premiums to these affiliates for the coverage provided by these third party and affiliate insurance providers. Policies covering these risks are written at various coverage levels but include a large self-insured retention or deductible. We have retention liability insurance from affiliated entities to insure these large retentions or deductibles. For the three months ended March 31, 2014 and 2013, amounts paid to affiliates for this retention insurance coverage were $5.1 million and $3.9 million, respectively.

13. Income Taxes

For the three months ended March 31, 2014, income tax expense was $7.7 million. At March 31, 2014, the net deferred tax asset was $15.9 million, which primarily related to available loss carryforwards, inventory and investment impairments, and housing inventory and land basis differences. The $0.5 million deferred tax asset valuation allowance relates to capital losses that expire in 2016 and 2017, and the impairment of debt securities that mature in 2021 and 2022. We continue to monitor industry and economic conditions, and our ability to generate taxable income to determine the recoverability of the net deferred tax assets .

In 2009, we filed a petition with the United States Tax Court (the “Tax Court”) regarding our position on the completed contract method (“CCM”) of accounting for our homebuilding operations. During 2010 and 2011, we engaged in formal and informal discovery with the IRS and the Tax Court heard trial testimony in July 2012 and ordered the Company and the IRS to exchange briefs, which were filed. On February 12, 2014, the Tax Court ruled in favor of the Company (the “Tax Court Decision”). Pursuant to the ruling, the Company is permitted to continue to report income and loss from the sale of homes in its planned developments using CCM. As a result, no additional tax, interest or penalties are currently due and owing by the Company or the Partners. The Tax Court Decision is subject to appeal by the IRS to the U.S. Court of Appeals for the Ninth Circuit, and any appeal must be made before July 21, 2014.

17

If the Tax Court Decision is appealed, we believe our position would prevail and, accordingly, have not recorded a liability for related taxes or interest for SHI. Furthermore, as a limited partnership, income taxes, interest or penalties imposed on SHLP are the Partners’ responsibility and are not reflected in the tax provision in these consolidated financial statements. However, if the Tax Court Decision is overturned, SHI could be obligated to pay the IRS and applicable state taxing authorities up to $66 million and, under the Tax Distribution Agreement, SHLP could be obligated to make a distribution to the Partners up to $109 million to fund their related payments to the IRS and applicable state taxing authorities. However, the Indenture provides the amount we may pay on behalf of SHI and distribute to the Partners of SHLP for the matter may not exceed $70.0 million. Any potential shortfall would be absorbed by the SHLP Partners.

The Company anticipates filing Form 3115 with the IRS during the fourth quarter 2014 to change its tax accounting method of how it records certain expenses on its income tax returns. As the Company believes it is more-likely-than-not the change will be approved by the IRS, the Company reflected this new tax accounting method in preparing the tax provision for the three months ended March 31, 2014. As a result, the effective tax rate for the three months ended March 31, 2014 was not materially higher.

14. Owners’ Equity

Owners’ equity consists of partners’ preferred and common capital. Common capital is comprised of limited partners with a collective 78.38% ownership and a general partner with a 20.62% ownership. Preferred capital is comprised of limited partners with either series B (“Series B”) or series D (“Series D”) classification. Series B holders have no ownership interest but earn a preferred return at 1.2% through December 31, 2016, 2.25% from January 1, 2017 to December 31, 2020, and Prime less 2.05% from January 1, 2021 and thereafter on unreturned capital balances. Series D holders have a 1% ownership interest and earn a preferred return at 2.0% through December 31, 2016, 12.75% from January 1, 2017 to December 31, 2020, and 7.0% from January 1, 2021 and thereafter on unreturned capital balances. At March 31, 2014 and December 31, 2013, accumulated undistributed preferred returns for Series B holders were $23.2 million and $22.7 million, respectively. At March 31, 2014 and December 31, 2013, accumulated undistributed preferred returns for Series D holders were $57.5 million and $56.6 million, respectively.

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

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

15. Contingencies and Commitments

At March 31, 2014 and December 31, 2013, certain unrecorded contingent liabilities and commitments were as follows:

	March 31, 2014		December 31, 2013
	(In thousands)
Tax Court CCM case (capped at $70.0 million, see Note 13)	$	70,000	$	70,000
Remargin obligations and guarantees for unconsolidated joint ventures (see Note 7)		28,554		28,684
Costs to complete on surety bonds for Company projects		79,258		77,276
Costs to complete on surety bonds for joint venture projects		22,807		22,845
Costs to complete on surety bonds for related party projects		1,614		1,614
Water system connection rights purchase obligation		30,506		30,506
Total unrecorded contingent liabilities and commitments	$	232,739	$	230,925

Legal Claims

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

18

We record a reserve for potential legal claims and regulatory matters when the specific facts and circumstances indicate that they are probable of occurring and a potential loss is reasonably estimable, and we revise these estimates when necessary. At March 31, 2014 and December 31, 2013, we had reserves of $4.7 million and $4.6 million, respectively, net of expected recoveries, relating to these claims and matters, and while their outcome cannot be predicted with certainty, we believe we have appropriately reserved for them. However, if the liability arising from their resolution exceeds their recorded reserves, we could incur additional charges that could be significant.

Due to the inherent difficulty of predicting outcomes of legal claims and related contingencies, we generally cannot predict their ultimate resolution, related timing or eventual loss. If our evaluations indicate loss contingencies that could be material are not probable, but are reasonably possible, we will disclose their nature with an estimate of possible range of losses or a statement that such loss is not reasonably estimable. Other than the Tax Court Decision discussed in Note 13, at March 31, 2014, the range of reasonably possible losses in excess of amounts accrued was not material.

Letters of Credit, Surety Bonds and Project Obligations

On May 10, 2011, we entered into a $75.0 million letter of credit facility. At December 31, 2013, there were no letters of credit outstanding. In February 2014, this facility was replaced with the new $125.0 million Revolver (see Note 10), under which up to $62.5 million of letters of credit may be issued. At March 31, 2014, there were no outstanding letters of credit against the Revolver.

We provide surety bonds that guarantee completion of certain infrastructure serving our homebuilding projects. At March 31, 2014, there was $79.3 million of costs to complete in connection with $169.5 million of surety bonds issued. At December 31, 2013, there was $77.3 million of costs to complete in connection with $169.7 million of surety bonds issued.

We also provide indemnification for bonds issued by certain unconsolidated joint ventures and other related party projects in which we have no ownership interest. At March 31, 2014, there was $22.8 million of costs to complete in connection with $63.3 million of surety bonds issued for unconsolidated joint venture projects, and $1.6 million of costs to complete in connection with $4.9 million of surety bonds issued for related party projects. At December 31, 2013, there was $22.8 million of costs to complete in connection with $63.7 million of surety bonds issued for unconsolidated joint venture projects, and $1.6 million of costs to complete in connection with $4.9 million of surety bonds issued for related party projects.

Certain of our homebuilding projects utilize community facility district, metro-district and other local government bond financing programs to fund acquisition or construction of infrastructure improvements. Interest and principal on these bonds are typically paid from taxes and assessments levied on landowners and/or homeowners following the closing of new homes in the project. Occasionally, we enter into credit support arrangements requiring us to pay interest and principal on these bonds if taxes and assessments levied on homeowners are insufficient to cover such obligations. Furthermore, reimbursement of these payments to us is dependent on the district or local government’s ability to generate sufficient tax and assessment revenues from the new homes. At March 31, 2014 and December 31, 2013, in connection with a credit support arrangement, there was $8.8 million and $8.6 million, respectively, reimbursable to us from certain agencies in Colorado and, accordingly, were recorded in inventory as a recoverable project cost.

We also pay certain fees and costs associated with the construction of infrastructure improvements in homebuilding projects that utilize these district bond financing programs. These fees and costs are typically reimbursable to us from, and therefore dependent on, bond proceeds or taxes and assessments levied on homeowners. At March 31, 2014 and December 31, 2013, in connection with certain funding arrangements, there was $13.1 million and $13.1 million, respectively, reimbursable to us from certain agencies, including $11.9 million and $11.9 million, respectively, from metro-districts in Colorado and, accordingly, were recorded in inventory as a recoverable project cost.

Until bond proceeds or tax and assessment revenues are sufficient to cover our obligations and/or reimburse us, our responsibility to make interest and principal payments on these bonds or pay fees and costs associated with the construction of infrastructure improvements could be prolonged and significant. In addition, if the bond proceeds or tax and assessment revenues are not sufficient to cover our obligations and/or reimburse us, these amounts might not be recoverable.

As a condition of the Vistancia Sale, and the purchase of the non-controlling member’s remaining interest in Vistancia, LLC, the Company effectively remains a 10% guarantor on certain community facility district bond obligations to which the Company must meet a minimum calculated tangible net worth; otherwise, the Company is required to fund collateral to the bond issuer. At March 31, 2014 and December 31, 2013, the Company exceeded the minimum tangible net worth requirement.

At a consolidated homebuilding project in Colorado, we have contractual obligations to purchase and receive water system connection rights which, at March 31, 2014 and December 31, 2013, had an estimated market value in excess of their contractual purchase price of $30.5 million. These water system connection rights are held, then transferred to homebuyers upon closing of their home, transferred upon sale of land to the respective buyer, sold or leased.

19

16. Supplemental Disclosure to Consolidated Statements of Cash Flows

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

	Three Months Ended March 31,
	2014			2013
	(In thousands)
Supplemental disclosure of cash flow information
Income taxes paid	$	207		$	25
Interest paid, net of amounts capitalized	$	0		$	109
Supplemental disclosure of noncash activities
Unrealized gain on available-for-sale investments, net	$	179		$	130
Reclassification of Deficit Distributions to unconsolidated joint ventures from other liabilities	$	184		$	0
Purchase of land in exchange for note payable	$	1,807		$	929
Distribution to Owners for assumption of liability and revenue participation payments for land purchased from a related party under common control	$	(20,891	)	$	0

17. Segment Information

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

• Southern California, comprised of communities in Los Angeles, Ventura and Orange Counties, and the Inland Empire;

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

• Northern California, comprised of communities in northern and central California, and the central coast of California;

• Mountain West, comprised of communities in Colorado and Washington;

• South West, comprised of communities in Arizona, Nevada and Texas: and

• East, comprised of communities in Florida and Virginia.

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

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

The reportable segments follow the same accounting policies as our consolidated financial statements described in Note 2. Operational results of each reportable segment are not necessarily indicative of the results that would have been achieved had the reportable segment been an independent, stand-alone entity during the periods presented.

20

Financial information relating to reportable segments was as follows:

	March 31, 2014		December 31, 2013
	(In thousands)
Total assets:
Southern California	$	387,270	$	316,339
San Diego		170,484		160,593
Northern California		299,867		286,513
Mountain West		333,369		316,459
South West		170,783		155,416
East		5,710		5,096
Total homebuilding assets		1,367,483		1,240,416
Corporate		155,964		264,917
Total assets	$	1,523,447	$	1,505,333

	March 31, 2014		December 31, 2013
	(In thousands)
Inventory:
Southern California	$	305,868	$	239,986
San Diego		153,069		142,395
Northern California		258,726		249,111
Mountain West		265,643		247,294
South West		146,046		132,484
East		2,844		2,002
Total inventory	$	1,132,196	$	1,013,272

	Three Months Ended March 31,
	2014		2013
	(In thousands)
Revenues:
Southern California	$	46,083	$	40,157
San Diego		17,031		9,629
Northern California		58,358		27,647
Mountain West		18,902		22,306
South West		39,531		33,533
East		0		1,567
Total homebuilding revenues		179,905		134,839
Corporate		210		121
Total revenues	$	180,115	$	134,960

	Three Months Ended March 31,
	2014			2013
	(In thousands)
Income (loss) before income taxes:
Southern California	$	4,678		$	7,891
San Diego		1,754			(1,424	)
Northern California		14,517			1,893
Mountain West		(1,895	)		(2,784	)
South West		575			1,055
East		(1,497	)		(74	)
Total homebuilding income (loss) before income taxes		18,132			6,557
Corporate		841			221
Total income (loss) before income taxes	$	18,973		$	6,778

21

18. Supplemental Guarantor Information

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

Pursuant to the indenture governing the Secured Notes, a guarantor may be released from its guarantee obligations only under certain customary circumstances specified in the indenture, namely (1) upon the sale or other disposition (including by way of consolidation or merger) of such guarantor, (2) upon the sale or disposition of all or substantially all the assets of such guarantor, (3) upon the designation of such guarantor as an unrestricted subsidiary for covenant purposes in accordance with the terms of the indenture, (4) upon a legal defeasance or covenant defeasance pursuant, or (5) upon the full satisfaction of our obligations under the indenture.

Presented herein are the condensed consolidated financial statements provided for in Rule 3-10(f) of Regulation S-K under the Securities Act for the guarantor subsidiaries and non-guarantor subsidiaries.

22

Condensed Consolidating Balance Sheet

March 31, 2014

	SHLP Corp(a)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Total
	(In thousands)
Assets
Cash and cash equivalents	$	51,081	$	45,042	$	8,652	$	0		$	104,775
Restricted cash		563		354		79		0			996
Accounts and other receivables, net		123,040		30,548		24,398		(24,141	)		153,845
Receivables from related parties, net		7,231		13,641		1,116		0			21,988
Inventory		884,590		246,664		4,076		(3,134	)		1,132,196
Investments in unconsolidated joint ventures		26,274		1,169		25,092		0			52,535
Investments in subsidiaries		737,766		71,709		89,615		(899,090	)		0
Other assets, net		25,984		30,997		131		0			57,112
Intercompany		0		492,016		0		(492,016	)		0
Total assets	$	1,856,529	$	932,140	$	153,159	$	(1,418,381	)	$	1,523,447
Liabilities and equity
Liabilities:
Notes payable	$	752,092	$	0	$	0	$	0		$	752,092
Payables to related parties		20		0		2		5,577			5,599
Accounts payable		27,860		16,159		586		0			44,605
Other liabilities		187,872		69,957		54,863		(24,141	)		288,551
Intercompany		456,483		0		44,244		(500,727	)		0
Total liabilities		1,424,327		86,116		99,695		(519,291	)		1,090,847
Equity:
SHLP equity:
Owners’ equity		427,235		841,057		53,066		(894,123	)		427,235
Accumulated other comprehensive income		4,967		4,967		0		(4,967	)		4,967
Total SHLP equity		432,202		846,024		53,066		(899,090	)		432,202
Non-controlling interests		0		0		398		0			398
Total equity		432,202		846,024		53,464		(899,090	)		432,600
Total liabilities and equity	$	1,856,529	$	932,140	$	153,159	$	(1,418,381	)	$	1,523,447

(a) Includes Shea Homes Funding Corp., whose financial position at March 31, 2014 was not material.

23

Condensed Consolidating Balance Sheet

December 31, 2013

	SHLP Corp(b)			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Total
	(In thousands)
Assets
Cash and cash equivalents	$	153,794		$	43,803	$	8,608	$	0		$	206,205
Restricted cash		695			354		140		0			1,189
Accounts and other receivables, net		120,299			26,754		28,696		(28,250	)		147,499
Receivables from related parties, net		9,251			22,027		796		276			32,350
Inventory		749,832			263,213		3,361		(3,134	)		1,013,272
Investments in unconsolidated joint ventures		22,068			1,091		24,589		0			47,748
Investments in subsidiaries		748,326			69,755		90,484		(908,565	)		0
Other assets, net		24,030			32,957		83		0			57,070
Intercompany		0			465,706		0		(465,706	)		0
Total assets	$	1,828,295		$	925,660	$	156,757	$	(1,405,379	)	$	1,505,333
Liabilities and equity
Liabilities:
Notes payable	$	751,708		$	0	$	0	$	0		$	751,708
Payables to related parties		20			0		1		0			21
Accounts payable		36,594			25,334		418		0			62,346
Other liabilities		171,470			41,370		61,211		(28,250	)		245,801
Intercompany		423,447			0		45,117		(468,564	)		0
Total liabilities		1,383,239			66,704		106,747		(496,814	)		1,059,876
Equity:
SHLP equity:
Owners’ equity		440,268	��		854,168		49,609		(903,777	)		440,268
Accumulated other comprehensive income		4,788			4,788		0		(4,788	)		4,788
Total SHLP equity		445,056			858,956		49,609		(908,565	)		445,056
Non-controlling interests		0			0		401		0			401
Total equity		445,056			858,956		50,010		(908,565	)		445,457
Total liabilities and equity	$	1,828,295		$	925,660	$	156,757	$	(1,405,379	)	$	1,505,333

(b) Includes Shea Homes Funding Corp., whose financial position at December 31, 2013 was not material.

24

Condensed Consolidating Statement of Income and Comprehensive Income

Three Months Ended March 31, 2014

	SHLP Corp(a)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
	(In thousands)
Revenues	$	87,594		$	89,108		$	3,413		$	0		$	180,115
Cost of sales		(70,738	)		(64,150	)		(370	)		0			(135,258	)
Gross margin		16,856			24,958			3,043			0			44,857
Selling expenses		(6,145	)		(3,904	)		(1,691	)		0			(11,740	)
General and administrative expenses		(10,544	)		(4,055	)		(705	)		0			(15,304	)
Equity in income (loss) from unconsolidated joint ventures, net		(501	)		32			875			0			406
Equity in income from subsidiaries		13,924			1,023			11			(14,958	)		0
Gain on reinsurance transaction		0			0			1,345			0			1,345
Interest expense		(118	)		0			0			0			(118	)
Other income (expense), net		(2,171	)		1,736			(38	)		0			(473	)
Income before income taxes		11,301			19,790			2,840			(14,958	)		18,973
Income tax expense		(3	)		(7,658	)		(17	)		0			(7,678	)
Net income		11,298			12,132			2,823			(14,958	)		11,295
Less: Net loss attributable to non-controlling interests		0			0			3			0			3
Net income attributable to SHLP	$	11,298		$	12,132		$	2,826		$	(14,958	)	$	11,298
Comprehensive income	$	11,477		$	12,311		$	2,823		$	(15,137	)	$	11,474

(a) Includes Shea Homes Funding Corp.; no significant activity occurred in 2014.

25

Condensed Consolidating Statement of Income and Comprehensive Income

Three Months Ended March 31, 2013

	SHLP Corp(b)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
	(In thousands)
Revenues	$	69,965		$	59,175		$	5,820		$	0		$	134,960
Cost of sales		(55,780	)		(47,386	)		(353	)		95			(103,424	)
Gross margin		14,185			11,789			5,467			95			31,536
Selling expenses		(5,206	)		(3,390	)		(1,558	)		0			(10,154	)
General and administrative expenses		(7,571	)		(3,497	)		(889	)		0			(11,957	)
Equity in income (loss) from unconsolidated joint ventures, net		(663	)		(19	)		50			0			(632	)
Equity in income (loss) from subsidiaries		9,407			395			(533	)		(9,269	)		0
Gain on reinsurance transaction		0			0			648			0			648
Interest expense		(2,434	)		(999	)		0			0			(3,433	)
Other income (expense), net		(877	)		1,241			501			(95	)		770
Income before income taxes		6,841			5,520			3,686			(9,269	)		6,778
Income tax benefit (expense)		(3	)		70			(8	)		0			59
Net income		6,838			5,590			3,678			(9,269	)		6,837
Less: Net loss attributable to non-controlling interests		0			0			1			0			1
Net income attributable to SHLP	$	6,838		$	5,590		$	3,679		$	(9,269	)	$	6,838
Comprehensive income	$	6,968		$	5,720		$	3,678		$	(9,399	)	$	6,967

(b) Includes Shea Homes Funding Corp.; no significant activity occurred in 2013.

26

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2014

	SHLP Corp(a)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
	(In thousands)
Operating activities
Net cash provided by (used in) operating activities	$	(133,069	)	$	24,620		$	(66	)	$	5,853		$	(102,662	)
Investing activities
Net decrease (increase) in promissory notes from related parties		2,583			8,206			(328	)		0			10,461
Investments in unconsolidated joint ventures		(4,172	)		(80	)		(200	)		0			(4,452	)
Other investing activities		0			86			0			0			86
Net cash provided by (used in) investing activities		(1,589	)		8,212			(528	)		0			6,095
Financing activities
Intercompany		36,808			(31,593	)		638			(5,853	)		0
Principal payments to financial institutions and others		(1,423	)		0			0			0			(1,423	)
Contributions from owners		945			0			0			0			945
Distributions to owners		(4,385	)		0			0			0			(4,385	)
Net cash provided by (used in) financing activities		31,945			(31,593	)		638			(5,853	)		(4,863	)
Net increase (decrease) in cash and cash equivalents		(102,713	)		1,239			44			0			(101,430	)
Cash and cash equivalents at beginning of period		153,794			43,803			8,608			0			206,205
Cash and cash equivalents at end of period	$	51,081		$	45,042		$	8,652		$	0		$	104,775

(a) Includes Shea Homes Funding Corp.; no significant activity occurred in 2014.

27

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2013

	SHLP Corp(a)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Total
	(In thousands)
Operating activities
Net cash provided by (used in) operating activities	$	(16,223	)	$	(16,369	)	$	2,633	$	1,996		$	(27,963	)
Investing activities
Investments in unconsolidated joint ventures		(4,011	)		(17	)		0		0			(4,028	)
Other investing activities		295			3,159			500		0			3,954
Net cash provided by (used in) investing activities		(3,716	)		3,142			500		0			(74	)
Financing activities
Principal payments to financial institutions and others		(241	)		0			0		0			(241	)
Intercompany		14,658			(20,279	)		7,617		(1,996	)		0
Net cash provided by (used in) financing activities		14,417			(20,279	)		7,617		(1,996	)		(241	)
Net increase (decrease) in cash and cash equivalents		(5,522	)		(33,506	)		10,750		0			(28,278	)
Cash and cash equivalents at beginning of period		216,914			48,895			13,947		0			279,756
Cash and cash equivalents at end of period	$	211,392		$	15,389		$	24,697	$	0		$	251,478

(b) Includes Shea Homes Funding Corp.; no significant activity occurred in 2013.

28

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and accompanying notes included under Item 1 of this Report and our audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2013.

RESULTS OF OPERATIONS

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

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

• Southern California, comprised of communities in Los Angeles, Ventura and Orange Counties, and the Inland Empire;

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

• Northern California, comprised of communities in northern and central California, and the central coast of California;

• Mountain West, comprised of communities in Colorado and Washington;

• South West, comprised of communities in Arizona, Nevada and Texas: and

• East, comprised of communities in Florida and Virginia.

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

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

29

Overview

The housing market overall remained fairly healthy in the first quarter of 2014. For the three months ended March 31, 2014 compared to the three months ended March 31, 2013, net homes sales orders increased 3%, due primarily to a higher average community count, homes closed increased 17% and homebuilding revenues increased 33%. Gross margin as a percentage of revenues improved from 23.4% to 24.9%. We have $115.4 million in cash, cash equivalents, restricted cash and investments and we expect to continue to invest in land opportunities in desirable locations to supplement our existing land positions.

	Three Months Ended March 31,
	2014			2013			% Change
	(Dollars in thousands)
Revenues	$	180,115		$	134,960			33	%
Cost of sales		(135,258	)		(103,424	)		31
Gross margin		44,857			31,536			42
Selling expenses		(11,740	)		(10,154	)		16
General and administrative expenses		(15,304	)		(11,957	)		28
Equity in income (loss) from unconsolidated joint ventures		406			(632	)		—
Gain on reinsurance transaction		1,345			648			108
Interest expense		(118	)		(3,433	)		(97	)
Other income (expense), net		(473	)		770			—
Income before income taxes		18,973			6,778			180
Income tax benefit (expense)		(7,678	)		59			—
Net income		11,295			6,837			65
Less: Net loss attributable to non-controlling interests		3			1			200
Net income attributable to SHLP	$	11,298		$	6,838			65	%
Comprehensive income	$	11,474		$	6,967			65	%

For the three months ended March 31, 2014, net income attributable to SHLP was $11.3 million compared to $6.8 million for the three months ended March 31, 2013. This increase in income was primarily attributable to a $13.3 million improvement in gross margins (driven by higher revenues and gross margin percentage), $1.0 million increase in equity income from unconsolidated joint ventures, $0.7 million increase in gain on reinsurance transaction and a $3.3 million decrease in interest expense, partially offset by a $3.3 million increase in general and administrative expenses (primarily from increased compensation expenses), a $1.6 million increase in selling expenses (primarily from increased closings), a $1.2 million decrease in other income and a $7.7 million increase in income tax expense.

Seasonality

Historically, the homebuilding industry experiences seasonal fluctuations. We typically experience the highest home sales order activity in spring and summer, although this activity is also highly dependent on the number of active selling communities, timing of community openings and other market factors. Since it typically takes three to eight months to construct a new home, we close more homes in the second half of the year as spring and summer home sales orders convert to home closings. Because of this seasonality, home starts, construction costs and related cash outflows have historically been higher from April to October, while the majority of cash receipts from home closings occur during the second half of the year. Therefore, operating results for the three months ended March 31, 2014 are not necessarily indicative of results expected for the year ended December 31, 2014.

Revenues

Revenues are derived primarily from home closings and land sales. House and land revenues are recorded at closing. Management fees from homebuilding ventures and projects are in other homebuilding revenues. Revenues from corporate, insurance brokerage services and our captive insurance company, Partners Insurance Company (“PIC”), are in other revenues.

	Three Months Ended March 31,
	2014		2013		% Change
	(Dollars in thousands)
Revenues:
House revenues	$	178,132	$	131,486		35	%
Land revenues		558		2,929		(81	)
Other homebuilding revenues		1,215		424		187
Total homebuilding revenues		179,905		134,839		33
Other revenues		210		121		74
Total revenues	$	180,115	$	134,960		33	%

30

For the three months ended March 31, 2014, total revenues were $180.1 million compared to $135.0 million for the three months ended March 31, 2013. This increase was primarily attributable to a 17% increase in homes closed and a 16% increase in the average selling price (“ASP”) of homes closed.

For the three months ended March 31, 2014 and 2013, homebuilding revenues by segment were as follows:

	Three Months Ended March 31,
	2014		2013		% Change
	(Dollars in thousands)
Southern California:
House revenues	$	45,928	$	37,975		21	%
Land revenues		55		2,175		(1	)
Other homebuilding revenues		100		7		1,329
Total homebuilding revenues	$	46,083	$	40,157		15	%
San Diego:
House revenues	$	16,965	$	9,627		76	%
Land revenues		65		0		100
Other homebuilding revenues		1		2		(50	)
Total homebuilding revenues	$	17,031	$	9,629		77	%
Northern California:
House revenues	$	57,864	$	27,522		110	%
Land revenues		0		0		0
Other homebuilding revenues		494		125		295
Total homebuilding revenues	$	58,358	$	27,647		111	%
Mountain West:
House revenues	$	18,379	$	21,369		(14	)%
Land revenues		438		754		(42	)
Other homebuilding revenues		85		183		(54	)
Total homebuilding revenues	$	18,902	$	22,306		(15	)%
South West:
House revenues	$	38,996	$	33,426		17	%
Land revenues		0		0		0
Other homebuilding revenues		535		107		400
Total homebuilding revenues	$	39,531	$	33,533		18	%
East:
House revenues	$	0	$	1,567		(100	)%
Land revenues		0		0		0
Other homebuilding revenues		0		0		0
Total homebuilding revenues	$	0	$	1,567		(100	)%

For the three months ended March 31, 2014, total homebuilding revenues were $179.9 million compared to $134.8 million for the three months ended March 31, 2013. This increase was primarily attributable to a 17% increase in homes closed and a 16% increase in the ASP of homes closed. The increase in deliveries was driven by higher deliveries in Southern California, San Diego, Northern California and the South West. The increase in the ASP of homes closed was primarily attributable to increases in new home prices and closings of larger, more expensive homes, primarily in Southern California, San Diego and Northern California.

31

For the three months ended March 31, 2014 and 2013, homes closed and ASP of homes closed by segment were as follows:

	Three Months Ended March 31,
	2014		2013		% Change
Homes closed:
Southern California		59		51		16	%
San Diego		34		23		48
Northern California		96		61		57
Mountain West		42		53		(21	)
South West		122		108		13
East		0		6		(100	)
Total consolidated		353		302		17
Unconsolidated joint ventures		53		27		96
Total homes closed		406		329		23	%

	Three Months Ended March 31,
	2014		2013		% Change
ASP of homes closed:
Southern California	$	778,441	$	744,608		5	%
San Diego		498,971		418,565		19
Northern California		602,750		451,180		34
Mountain West		437,595		403,189		9
South West		319,639		309,500		3
East		0		261,167		(100	)
Total consolidated		504,623		435,384		16
Unconsolidated joint ventures		381,660		339,630		12
Total ASP of homes closed	$	488,571	$	427,526		14	%

Home closings increased year over year in each segment, except Mountain West and East, as a result of increased sales order trends in recent quarters and a faster backlog conversion rate. The decrease in the Mountain West and East segments were due to reduced active selling communities compared to 2013, and a slowdown of sales orders in some markets in the South West segment, primarily Arizona. The increase in the average selling price of homes closed was primarily attributable to price increases in all segments, and closings of larger, more expensive homes, primarily in Southern California, San Diego and Northern California.

Gross Margin

Gross margin is revenues less cost of sales and is comprised of gross margins from our homebuilding and corporate segments.

Gross margins for the three months ended March 31, 2014 and 2013 were as follows:

	Three Months Ended March 31,
	2014		Gross Margin %			2013		Gross Margin %
	(Dollars in thousands)
Gross margin	$	44,857		24.9	%	$	31,536		23.4	%

For the three months ended March 31, 2014, total gross margin was $44.9 million compared to $31.5 million for the three months ended March 31, 2013. This increase was primarily attributable to increased homes closed and a higher margin percentage resulting from price increases in all segments.

32

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2014 and 2013 were as follows:

	Three Months Ended March 31,
	2014			2013			% Change
	(Dollars in thousands)
Total homebuilding revenues	$	179,905		$	134,839			33	%
Selling expenses	$	11,740		$	10,154			16	%
% of total homebuilding revenues		6.5	%		7.5	%
General and administrative expenses	$	15,304		$	11,957			28	%
% of total homebuilding revenues		8.5	%		8.9	%
Total selling, general and administrative expenses	$	27,044		$	22,111			22	%
% of total homebuilding revenues		15.0	%		16.4	%

Selling Expenses

For the three months ended March 31, 2014, selling expenses were $11.7 million compared to $10.2 million for the three months ended March 31, 2013. The increase was primarily attributable to higher closings but decreased as a percentage of revenues from leveraging certain fixed costs over higher homebuilding revenues.

General and Administrative Expenses

For the three months ended March 31, 2014, general and administrative expenses were $15.3 million compared to $11.9 million for the three months ended March 31, 2013. The increase was primarily attributable to higher compensation expenses.

Equity in Income (Loss) from Unconsolidated Joint Ventures

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

For the three months ended March 31, 2014, equity in income (loss) from unconsolidated joint ventures was $0.4 million compared to $(0.6) million for the three months ended March 31, 2013. For the three months ended March 31, 2014 and 2013, there were no significant earnings or losses from any unconsolidated joint venture.

Gain on Reinsurance Transaction

Completed operations claims for policy years August 1, 2001 to July 31, 2007, and workers’ compensation and general liability risks for policy years August 1, 2001 to July 31, 2005, were previously insured through PIC. In December 2009, PIC entered into a series of transactions (the “PIC Transaction”) in which these policies were either novated to JFSCI or reinsured with third-party insurance carriers. As a result of the PIC Transaction, a $34.8 million gain was deferred and to be recognized as income when related claims are paid. In addition, the deferred gain can be adjusted based on changes in actuarial estimates. Any changes to the deferred gain is recognized in the current period.

For the three months ended March 31, 2014 and 2013, gains of $1.3 million and $0.6 million were recognized based on claims paid.

Interest Expense

Interest expense is interest incurred and not capitalized. For the three months ended March 31, 2014, substantially all interest incurred was capitalized. For the three months ended March 31, 2013, most interest incurred was capitalized to inventory with the remainder expensed since debt exceeded the qualified asset amount. Assets qualify for interest capitalization during their development and other qualifying activities such as construction; however, if qualified assets are less than the total debt, a portion of interest is expensed.

For the three months ended March 31, 2014, interest expense was $0.1 million compared to $3.4 million for the three months ended March 31, 2013. This decrease was primarily attributable to higher qualified assets. Interest expense for the three months ended March 31, 2014 represents fees for the unused portion of our $125.0 million secured revolving credit facility (the “Revolver”) and is not capitalizable.

33

Other Income (Expense), Net

Other income (expense), net is comprised of interest income, gains (losses) on sales of investments, pre-acquisition cost and deposit write-offs, property tax expense and other income (expense). Interest income is primarily from related party notes receivables, investments and interest bearing cash accounts.

For the three months ended March 31, 2014 and 2013, other income (expense), net was as follows:

	Three Months Ended March 31,
	2014			2013			% Change
	(Dollars in thousands)
Other income (expense), net:
Interest income	$	374		$	620			(40	)%
Gain on sale of investments		0			10			(100	)
Preacquisition cost and deposit write-offs		(357	)		(112	)		219
Property tax expense		(752	)		(803	)		(6	)
Deposit forfeitures and cancellation fees		62			634			(90	)
Other income (expense)		200			421			(52	)
Total other income (expense), net	$	(473	)	$	770			—	%

For the three months ended March 31, 2014, other income (expense), net was $(0.5) million compared to $0.8 million for the three months ended March 31, 2013. This decrease was primarily attributable to decreased interest income in the Company’s bank and investment accounts and decreased deposit forfeitures and cancellation fees. Cancellation fees for the three months ended March 31, 2013 included a fee received for the termination of a managed real estate project.

Income Tax Benefit (Expense)

SHLP is treated as a partnership for income tax purposes. As a limited partnership, SHLP is subject to certain minimal state taxes and fees; however, taxes on income realized by SHLP are generally the obligation of SHLP’s general and limited partners and their owners. As SHI is a C corporation, federal and state income taxes are included in these consolidated financial statements.

At March 31, 2014 and December 31, 2013, net deferred tax assets of SHI before reserves were $16.4 million and $16.8 million, respectively, which primarily related to available loss carryforwards, inventory and investment impairments, and housing and land inventory basis differences. At December 31, 2013, SHI had net operating loss carryforwards of approximately $18.8 million, net, that expire by 2018 and are subject to annual limitations of $4.6 million.

When assessing the realizability of deferred tax assets, we consider whether it is more-likely-than-not that our deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon generating sufficient taxable income in the future. We record a valuation allowance when we determine it is more-likely-than-not a portion of the deferred tax assets will not be realized. At March 31, 2014 and December 31, 2013, the deferred tax asset valuation allowance was $0.5 million and $0.5 million, respectively, and related to capital losses that expire in 2016 and 2017, and impairment of debt securities that mature in 2021 and 2022, as it is unknown if these deferred tax assets will be realized.

Accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcome of these future results could result in changes in our estimates of our deferred tax assets and related valuation allowances, and could also materially impact our consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation of our deferred tax assets.

We anticipate filing Form 3115 with the IRS during the fourth quarter 2014 to change our tax accounting method of how we record certain expenses on our income tax returns. As we believe it is more-likely-than-not the change will be approved by the IRS, we reflected this new tax accounting method in preparing the tax provision for the three months ended March 31, 2014. As a result, the effective tax rate for March 31, 2014 was not materially higher.

For the three months ended March 31, 2014, income tax benefit (expense) was $(7.7) million compared to $0.1 million for the three months ended March 31, 2013. This change was primarily attributable to the valuation allowance reduction (and corresponding reduction in income tax expense) for the three months ended March 31, 2013 and the year over year increase in taxable income for the three months ended March 31, 2014.

34

Net Loss Attributable to Non-Controlling Interests

Joint ventures are consolidated when we have a controlling interest or, absent a controlling interest, when we can substantially influence its business. Net loss attributable to non-controlling interests represents the share of loss attributable to the parties having a non-controlling interest.

SELECTED HOMEBUILDING OPERATIONAL DATA

Homes Sales Orders and Active Selling Communities

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

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

For the three months ended March 31, 2014 and 2013, home sales orders, net of cancellations, were as follows:

	Three Months Ended March 31,
	2014		2013		% Change
Home sales orders, net:
Southern California		158		54		193	%
San Diego		47		91		(48	)
Northern California		119		120		(1	)
Mountain West		112		112		0
South West		97		140		(31	)
East		—		2		(100	)
Total consolidated		533		519		3
Unconsolidated joint ventures		95		46		107
Total home sales orders, net		628		565		11	%

For the three months ended March 31, 2014 and 2013, cancellation rates were as follows:

	Three Months Ended March 31,
	2014			2013
Cancellation rates:
Southern California		5	%		11	%
San Diego		19			19
Northern California		15			9
Mountain West		13			13
South West		18			15
East		0			33
Total consolidated		13	%		14	%
Unconsolidated joint ventures		25			19
Total cancellation rates		15	%		14	%

35

For the three months ended March 31, 2014 and 2013, average active selling communities were as follows:

	Three Months Ended March 31,
	2014		2013		% Change
Average number of active selling communities:
Southern California		9		5		80	%
San Diego		7		7		0
Northern California		14		12		17
Mountain West		12		14		(14	)
South West		17		16		6
East		0		2		(100	)
Total consolidated		59		56		5
Unconsolidated joint ventures		16		11		45
Total average number of active selling communities		75		67		12	%

For the three months ended March 31, 2014, consolidated home sales orders per active selling community were 9.0, or 3.0 per month, compared to 9.3, or 3.1 per month, for the three months ended March 31, 2013. For the three months ended March 31, 2014, the decrease reflects the weaker market condition in some markets in the South West segment, primarily Arizona.

Sales Order Backlog

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

The decrease in homes in backlog at March 31, 2014, compared to March 31, 2013, is primarily attributable to increased closings from faster backlog conversions, partially offset by increased home sales orders.

At March 31, 2014 and 2013, sales order backlog was as follows:

	Homes				Sales Value				ASP
	March 31,				March 31,				March 31,
	2014		2013		2014		2013		2014		2013
					(In thousands)				(In thousands)
Backlog:
Southern California		259		126	$	216,123	$	93,404	$	834	$	741
San Diego		113		175		60,078		80,748		532		461
Northern California		167		300		118,198		143,452		708		478
Mountain West		277		271		132,922		125,073		480		462
South West		213		244		73,737		78,580		346		322
East		0		12		0		3,182		0		265
Total consolidated		1,029		1,128		601,058		524,439		584		465
Unconsolidated joint ventures		164		103		63,265		31,837		386		309
Total backlog		1,193		1,231	$	664,323	$	556,276	$	557	$	452

Land and Homes in Inventory

Inventory is comprised of housing projects under development, land under development, land held for future development, land held for sale, deposits and pre-acquisition costs. As land is acquired and developed, and homes are constructed, the underlying costs are capitalized to inventory. As homes and land transactions close, these costs are relieved from inventory and charged to cost of sales.

36

As land is acquired and developed, each parcel is assigned a lot count. For parcels of land, an estimated number of lots are added to inventory once entitlement occurs. Occasionally, when the intended use of a parcel changes, lot counts are adjusted. As homes and land are sold, lot counts are reduced. Lots are categorized as (i) owned, (ii) controlled (which includes a contractual right to purchase) or (iii) owned or controlled through unconsolidated joint ventures. The status of each lot is identified by land held for development, land under development, land held for sale, lots available for construction, homes under construction, completed homes and models. Homes under construction and completed homes are also classified as sold or unsold.

Inventory dollars at March 31, 2014 increased from December 31, 2013 primarily due to increased land acquisitions and homes under construction due to the continued improvement in the housing market.

At March 31, 2014, December 31, 2013 and March 31, 2013, total lots owned or controlled were as follows:

	March 31, 2014		December 31, 2013		% Change from December 31, 2013			March 31, 2013			% Change from March 31, 2013
Lots owned or controlled by segment:
Southern California		1,749		1,890		(7	)%		1,938			(10	)%
San Diego		606		640		(5	)		746			(19	)
Northern California		3,735		3,731		0			3,166			18
Mountain West		9,798		9,841		0			10,383			(6	)
South West		2,102		2,063		2			2,442			(14	)
East		765		765		0			19			3,926
Total consolidated		18,755		18,930		(1	)		18,694			0
Unconsolidated joint ventures		4,369		4,455		(2	)		3,802			15
Total lots owned or controlled		23,124		23,385		(1	)%		22,496	��		3	%
Lots owned or controlled by ownership type:
Lots owned for homebuilding		6,816		6,277		9	%		6,459			6	%
Lots owned and held for sale		3,395		3,313		2			3,293			3
Lots optioned or subject to contract for homebuilding		5,510		6,306		(13	)		5,908			(7	)
Lots optioned or subject to contract that will be held for sale		3,034		3,034		0			3,034			0
Unconsolidated joint venture lots		4,369		4,455		(2	)		3,802			15
Total lots owned or controlled		23,124		23,385		(1	)%		22,496			3	%

At March 31, 2014, December 31, 2013 and March 31, 2013, total homes under construction and completed homes were as follows:

	March 31, 2014		December 31, 2013		% Change from December 31, 2013			March 31, 2013		% Change from March 31, 2013
Homes under construction:
Sold		748		611		22	%		793		(6	)%
Unsold		147		149		(1	)		71		107
Total consolidated		895		760		18			864		4
Unconsolidated joint ventures		117		119		(2	)		65		80
Total homes under construction		1,012		879		15	%		929		9	%
Completed homes:(a)
Sold(b)		68		49		39	%		67		1	%
Unsold		30		34		(12	)		27		11
Total consolidated		98		83		18			94		4
Unconsolidated joint ventures		14		8		75			21		(33	)
Total completed homes		112		91		23	%		115		(3	)%

^(a)  Excludes model homes

^(b)  Sold but not closed

37

LIQUIDITY AND CAPITAL RESOURCES

Operating and other short-term cash liquidity needs have been primarily funded from cash on our balance sheet and our homebuilding operations primarily through home closings and land sales, net of the underlying expenditures to fund these operations. In addition, the Company has, and will continue to utilize, land option contracts, public and private note offerings, land seller notes, joint venture structures (which typically obtain project level financing to reduce the amount of partner capital invested), assessment district bond financing, letters of credit and surety bonds, tax refunds and proceeds from related party note receivables as sources of liquidity. In addition, as an additional source of liquidity, we obtained a $125.0 million Revolver in February 2014 (see below). At March 31, 2014, cash and cash equivalents were $104.8 million, restricted cash was $1.0 million and total debt was $752.1 million, compared to cash and cash equivalents of $206.2 million, restricted cash of $1.2 million and total debt of $751.7 million at December 31, 2013. Restricted cash includes customer deposits temporarily restricted in accordance with regulatory requirements and cash used in lieu of bonds.

In February 2014, we replaced our $75.0 million letter of credit facility with the Revolver, which bears interest, at the Company’s option, either at (i) a daily Eurocurrency base rate as defined in the Credit Agreement, plus a margin of 2.75%, or (ii) a Eurocurrency rate as defined in the Credit Agreement, plus a margin of 2.75%, and matures March 1, 2016. Borrowing availability is determined by a borrowing base formula and we are subject to financial covenants, including minimum net worth and leverage and interest coverage ratios. If we do not maintain compliance with these financial covenants, the Revolver converts to an 18-month amortizing term loan. At March 31, 2014, no amounts were outstanding under the Revolver.

We believe the Revolver, combined with other available sources, such as existing cash, cash equivalents and cash from operations, are sufficient to provide for our cash requirements in the next twelve months. In evaluating this sufficiency, we considered the expected cash flow to be generated by homebuilding operations, our current cash position and other sources of liquidity available to us, compared to anticipated cash requirements for interest payments on the Secured Notes and Revolver, land purchase commitments and land development expenditures, joint venture funding requirements and other cash operating expenses. We also continually monitor current and expected operational requirements to evaluate and determine the use and amount of our cash needs which includes, but is not limited to, the following disciplines:

• Strategic land acquisitions that meet our investment and marketing standards, including, in most cases, the quick turn of assets;

• Strict control and limitation of unsold home inventory and avoidance of excessive and untimely uses of cash;

• Pre-qualification of homebuyers, timely commencement of home construction thereon and mitigation of cancellations and creation of unsold inventory;

• Reduced construction cycle times, prompt closings of homes and improved cash flow thereon; and

• Maintenance of sufficient cash or other sources of liquidity that, depending on market conditions, will be available to acquire land and increase our active selling communities.

Availability of additional capital, whether from private capital sources (including banks) or the public capital markets, fluctuates as market conditions change. There may be times when the private capital markets and the public debt markets lack sufficient liquidity or when our securities cannot be sold at attractive prices, in which case we would be unable to access capital from these sources. Weakening of our financial condition, including a material increase in our leverage or decrease in profitability or cash flows, could adversely affect our ability to obtain necessary funds, result in a credit rating downgrade or change in outlook, or otherwise increase our cost of borrowing.

In 2009, we filed a petition with the United States Tax Court (the “Tax Court”) regarding our position on the completed contract method (“CCM”) of accounting for our homebuilding operations. During 2010 and 2011, we engaged in formal and informal discovery with the IRS and the Tax Court heard trial testimony in July 2012 and ordered the Company and the IRS to exchange briefs, which were filed. On February 12, 2014, the Tax Court ruled in favor of the Company (the “Tax Court Decision”). Pursuant to the ruling, the Company is permitted to continue to report income and loss from the sale of homes in their planned developments using CCM. As a result, no additional tax, interest or penalties are currently due and owing by the Company or the Partners. The Tax Court Decision is subject to appeal by the IRS to the U.S. Court of Appeals for the Ninth Circuit, and any appeal must be made before July 21, 2014.

If the Tax Court Decision is appealed and overturned, SHI could be obligated to pay the IRS and applicable state taxing authorities up to $66 million and, under the Tax Distribution Agreement, SHLP could be obligated to make a distribution to the Partners up to $109 million to fund their related payments to the IRS and applicable state taxing authorities.

38

Notwithstanding, the indenture governing the Secured Notes (the “Indenture”) restricts SHLP’s ability to make distributions to its partners pursuant to the Tax Distribution Agreement in excess of an amount specified by the Indenture (such maximum amount of collective distributions referred to as the “Maximum CCM Payment”), unless SHLP receives a cash equity contribution from JFSCI for such excess. The initial Maximum CCM Payment is $70.0 million, which amount will be reduced by payments made by SHI in connection with any resolution of our dispute with the IRS regarding our use of CCM and payments made by SHLP on certain guarantee obligations described in the Indenture. Payments of CCM-related tax liabilities by SHLP pursuant to the Tax Distribution Agreement or by SHI will not impact our Consolidated Fixed Charge Coverage Ratio (as defined below) or our ability to incur additional indebtedness under the terms of the Indenture.

If necessary, SHLP and SHI expect to pay any CCM-related tax liability from existing cash, cash from operations and, to the extent SHLP is required by the Tax Distribution Agreement to pay amounts in excess of the Maximum CCM Payment, from cash equity contributions by JFSCI. However, cash from homebuilding operations may be insufficient to cover such payments. See “Risk Factors—The IRS can challenge our income and expense recognition methodologies. If we are unsuccessful in supporting or defending our positions, we could become subject to a substantial tax liability from previous years” and “Risk Factors—Under our Tax Distribution Agreement, we are required to make distributions to our equity holders from time to time based on their ownership in SHLP, which is a limited partnership and, under certain circumstances, those distributions may occur even if SHLP does not have taxable income” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

We are unable to extend our evaluation of the sufficiency of our liquidity beyond twelve months, and we cannot assure in the future our homebuilding operations will generate sufficient cash flow to enable us to grow our business, service our indebtedness, make payments toward land purchase commitments, or fund our joint ventures. For more information, see “Risk Factors—Our ability to generate sufficient cash or access other limited sources of liquidity to operate our business and service our debt depends on many factors, some of which are beyond our control” and “Risk Factors—We have a significant number of contingent liabilities, and if any are satisfied by us, could have a material adverse effect on our liquidity and results of operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The following tables present cash provided by (used in) operating, investing and financing activities:

	Three Months Ended March 31,
	2014			2013
	(In thousands)
Cash provided by (used in):
Operating activities	$	(102,662	)	$	(27,963	)
Investing activities		6,095			(74	)
Financing activities		(4,863	)		(241	)
Net increase (decrease) in cash	$	(101,430	)	$	(28,278	)

Cash from Operating Activities

For the three months ended March 31, 2014, cash provided by (used in) operating activities was $(102.7) million compared to $(28.0) million for the three months ended March 31, 2013. This increase in cash usage was primarily attributable to increased land acquisitions, land development and house construction costs, partially offset by increased cash receipts from home closings. For the three months ended March 31, 2014, land acquisition and development costs were $128.7 million, house construction costs were $108.2 million, and cash receipts from home closings were $178.1 million compared to land acquisition and development costs of $29.6 million, house construction costs of $101.5 million, and cash receipts from home closings of $131.5 million for the three months ended March 31, 2013. The increase in cash used for land acquisition and development costs, and the increase in cash receipts from home closings, as compared to the three months ended March 31, 2013 were due to the continued improvement in housing market conditions. In addition, for the three months ended March 31, 2013, the Company’s bank released $10.0 million of restricted cash that was previously used as collateral for potential obligations paid by the Company’s bank.

Cash from Investing Activities

For the three months ended March 31, 2014, cash provided by (used in) investing activities was $6.1 million compared to $(0.1) million for the three months ended March 31, 2013. This increase in cash provided was primarily attributable to a $10.1 million increase in collections on promissory notes from related parties, which was primarily the result of an $8.4 million prepayment made by JFSCI on its loan with the Company. Partially offsetting these increases were a $2.9 million decrease in proceeds from the sale of marketable securities.

39

Cash from Financing Activities

For the three months ended March 31, 2014, cash provided by (used in) financing activities was $(4.9) million compared to $(0.2) million for the three months ended March 31, 2013. This increase in cash usage was primarily attributable to the $4.4 million cash payment for the acquisition of land from a related party under common control which was recorded as an equity distribution to its owners.

Notes Payable

At March 31, 2014 and December 31, 2013, notes payable were as follows:

	March 31, 2014		December 31, 2013
Notes payable:
Secured Notes	$	750,000	$	750,000
Revolver		0		0
Other secured promissory notes		2,092		1,708
Total notes payable	$	752,092	$	751,708

Secured Notes

On May 10, 2011, our Secured Notes were issued at $750.0 million, bear interest at 8.625% paid semi-annually on May 15 and November 15, and do not require principal payments until maturity on May 15, 2019. The Secured Notes are redeemable, in whole or in part, at the Company’s option beginning on May 15, 2015 at a price of 104.313 per bond, reducing to 102.156 on May 15, 2016 and are redeemable at par beginning on May 15, 2017. At March 31, 2014 and December 31, 2013, accrued interest was $24.3 million and $8.1 million, respectively.

The Indenture governing the Secured Notes contains covenants that limit, among other things, our ability to incur additional indebtedness (including the issuance of certain preferred stock), pay dividends and distributions on our equity interests, repurchase our equity interests, retire unsecured or subordinated notes more than one year prior to their maturity, make investments in subsidiaries and joint ventures that are not restricted subsidiaries that guarantee the Secured Notes, sell certain assets, incur liens, merge with or into other companies, expand into unrelated businesses, and enter into certain transactions with affiliates. At March 31, 2014 and December 31, 2013, we were in compliance with these covenants.

The indenture governing the Secured Notes provides that we and our restricted subsidiaries may not incur or guarantee the payment of any indebtedness (other than certain specified types of permitted indebtedness) unless, immediately after giving effect to such incurrence or guarantee and the application of the proceeds therefrom, the Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) would be at least 2.0 to 1.0. “Consolidated Fixed Charge Coverage Ratio” is defined in the Indenture as the ratio of (i) our Consolidated Cash Flow Available for Fixed Charges (as defined in the Indenture) for such prior four full fiscal quarters, to (ii) our aggregate Consolidated Interest Expense (as defined in the Indenture) for such prior four full fiscal quarters, in each case giving pro forma effect to certain transactions as specified in the Indenture. At March 31, 2014, our Consolidated Fixed Charge Coverage Ratio, determined as specified in the Indenture, was 2.66.

Our ability to make joint venture and other restricted payments and investments is governed by the Indenture. We are permitted to make restricted payments under (i) a $70.0 million revolving basket available solely for joint venture investments and (ii) a broader restricted payment basket available as long as our Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) is at least 2.0 to 1.0. The aggregate amount of the restricted payments made under this broader restricted payment basket cannot exceed 50% of our cumulative Consolidated Net Income (as defined in the Indenture), generated from and including October 1, 2013, plus the aggregate net cash proceeds of, and the fair market value of, any property or other asset received by the Company as a capital contribution or upon the issuance of indebtedness or certain securities by the Company from and including October 1, 2013, plus, to the extent not included in Consolidated Net Income, certain amounts received in connection with dispositions, distributions or repayments of restricted investments, plus the value of any unrestricted subsidiary which is redesignated as a restricted subsidiary under the Indenture. We have joint ventures which have used, and are expected to use, capacity under these restricted payment baskets. In 2013, we entered into a joint venture in Southern California and committed to contribute up to $45.0 million of capital. At March 31, 2014, we made aggregate capital contributions of $15.1 million to this joint venture. We project our peak investment of $45.0 million in this joint venture will occur in the fourth quarter of 2014 and, shortly thereafter, will be returned to us. In 2015, we anticipate making additional investments in this joint venture at amounts below the $45.0 million commitment, and expect such additional investments will be returned by the end of 2015. We anticipate making additional investments in other joint ventures.

40

Revolver

In February 2014, we replaced our $75.0 million secured letter of credit facility with the $125.0 million Revolver, which bears interest, at the Company’s option, either at (i) a daily Eurocurrency base rate as defined in the Credit Agreement, plus a margin of 2.75%, or (ii) a Eurocurrency rate as defined in the Credit Agreement, plus a margin of 2.75%, and matures March 1, 2016. Borrowing availability is determined by a borrowing base formula and we are subject to financial covenants, including minimum net worth and leverage and interest coverage ratios. If we do not maintain compliance with these financial covenants, the Revolver converts to an18-month amortizing term loan. At March 31, 2014, we were in compliance with these covenants.

At March 31, 2014, covenant compliance for the Revolver was as follows:

	Actual at March 31, 2014		Covenant Requirements at March 31, 2014
	(Dollars in thousands)
Covenant Requirements:
Minimum Consolidated Tangible Net Worth(a)	$	456,931	$	338,836
Minimum Liquidity	$	96,242	³  $	5,000
Ratio of Land Assets to Tangible Net Worth		1.47		£ 2.0
Interest Coverage Ratio		2.96		³ 1.5
Adjusted Leverage Ratio(b)		1.45		£ 2.5
Permitted Maximum Senior Leverage Ratio		0		£ 0.75
Actual/Permitted Borrowings(c)	$	0	$	125,000

^(a)  Consolidated Tangible Net Worth (TNW) cannot be less than the sum of: (a) 75% of consolidated TNW as of the most recently fiscal quarter prior to the Effective Date, as defined in the Revolver agreement, plus (b) 50% of the cumulative Net Cash Proceeds, as defined in the Revolver Agreement, of any Equity Issuances received by borrower after Effective Date plus (c) 50% of the cumulative consolidated Net Income minus income taxes of 50%.

^(b)  Not to be greater than 2.5 prior to and including 12/31/2014 and 2.0 after 12/31/14.

^(c)  Borrowing capacity under the provision of the borrowing base, as defined in the Credit Agreement.

CONTRACTUAL OBLIGATIONS, COMMERCIAL COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS

Contractual Obligations

Primary contractual obligations are payments under notes payable, operating leases and purchase obligations. Purchase obligations primarily represent land purchase and option contracts, and purchase obligations for water system connection rights. At March 31, 2014, there were no material changes to contractual obligations from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Land Purchase and Option Contracts

In the ordinary course of business, we enter into land purchase and option contracts to procure land for construction of homes. These contracts typically require a cash deposit and the purchase is often contingent on satisfaction of certain requirements by land sellers, including securing property and development entitlements. We utilize option contracts to acquire large tracts of land in smaller parcels to better manage financial and market risk of holding land and to reduce use of funds. Option contracts generally require a non-refundable deposit after a diligence period for the right to acquire lots over a specified period of time at a predetermined price. However, in certain circumstances, the purchase price may not, in whole or in part, be determinable and payable until the homes or lots are closed. In such instances, an estimated purchase price for the unknown portion is not included in the total remaining purchase price. At March 31, 2014, we had owned or controlled 7,196 lots in Colorado for which the entire purchase price is determined at the time the underlying lots close with a home buyer or other purchaser of the lot. At our discretion, we generally have rights to terminate our obligations under purchase and option contracts by forfeiting our cash deposit or repaying amounts drawn under our letters of credit with no further financial responsibility to the land seller. However, purchase contracts can contain additional development obligations that must be completed even if a contract is terminated.

Use of option contracts is dependent on the willingness of land sellers, availability of capital, housing market conditions and geographic preferences. Options may be more difficult to obtain from land sellers in stronger housing markets and are more prevalent in certain geographic regions.

41

At March 31, 2014, we had $19.7 million in option contract deposits on land with a total remaining purchase price, excluding land subject to option contracts that do not specify a purchase price, of $372.6 million, compared to $21.0 million and $422.3 million, respectively, at December 31, 2013.

Water System Connection Rights

At a homebuilding project in Colorado, we have a contractual obligation to purchase and receive water system connection rights which, at March 31, 2014, had an estimated market value in excess of their contractual purchase price of $30.5 million. These water system connection rights are held, then transferred to homebuyers upon closing of their home, transferred upon the sale of land to the respective buyer, sold or leased.

Land Development and Homebuilding Joint Ventures

We enter into land development and homebuilding joint ventures for the following purposes:

• leveraging our capital base;

• managing and reducing financial and market risks of holding land;

• establishing strategic alliances;

• accessing lot positions; and

• expanding market share.

These joint ventures typically obtain secured acquisition, development and construction financing, each designed to reduce use of corporate funds.

At March 31, 2014 and December 31, 2013, total unconsolidated joint ventures’ notes payable were as follows:

	March 31, 2014		December 31, 2013
	(In thousands)
Bank and seller notes payable:
Guaranteed (subject to remargin obligations)	$	49,663	$	52,515
Non-Guaranteed		11,010		10,073
Total bank and seller notes payable(a)		60,673		62,588
Partner notes payable:
Unsecured(b)		15,844		16,001
Total unconsolidated joint venture notes payable	$	76,517	$	78,589
Other unconsolidated joint venture notes payable(c)	$	12,051	$	55,441

(a) All bank seller notes were secured by real property.

(b) No guarantees were provided on partner notes payable. In January 2014, a $3.2 million partner note from one joint venture was paid off.

(c) Through indirect effective ownership in two joint ventures of 12.3% and 0.0003%, respectively, that had bank notes payable secured by real property in which we have not provided any guarantee.

At March 31, 2014 and December 31, 2013, remargin obligations and guarantees provided on debt of our unconsolidated joint ventures were on a joint and/or several basis and include, but are not limited to, project completion, interest and carry, andloan-to-value maintenance guarantees.

For a joint venture, RRWS, LLC (“RRWS”), we have a remargin obligation that is limited to the lesser of 50% of the outstanding balance or $35.0 million in total for all of the joint venture loans, which outstanding loan balances at March 31, 2014 and December 31, 2013 were $42.2 million and $47.7 million, respectively. Consequently, our maximum remargin obligation at March 31, 2014 and December 31, 2013 was $21.1 million and $23.8 million, respectively. We also have an indemnification agreement where we could potentially recover a portion of any remargin payments made by the Company. However, we cannot provide assurance we could collect under this indemnity agreement.

42

For a second joint venture, Polo Estate Ventures, LLC (“Polo”), we have a joint and several remargin guarantee on loan obligations that, in total, at March 31, 2014 and December 31, 2013, were $7.4 million and $4.8 million, respectively. At March 31, 2014 and December 31, 2013, total maximum borrowings permitted on these loans were $21.6 million and $21.6 million, respectively. We also have reimbursement rights where we could potentially recover a portion of any remargin payments made by the Company. However, we cannot provide assurance we could collect such reimbursements.

No liabilities were recorded for these guarantees at March 31, 2014 and December 31, 2013 as the fair value of the secured real estate assets exceeded the threshold at which a remargin payment would be required.

We may be required to use funds for obligations of these joint ventures, such as:

• loans (including to replace expiring loans, to satisfy loan re-margin and land development and construction completion obligations or to satisfy environmental indemnity obligations);

• development and construction costs;

• indemnity obligations to surety providers;

• land purchase obligations; and

• dissolutions (including satisfaction of joint venture indebtedness through repayment or the assumption of such indebtedness, payments to partners in connection with the dissolution, or payment of the remaining costs to complete, including warranty and legal obligations).

Guarantees, Surety Obligations and Other Contingencies

At March 31, 2014 and December 31, 2013, maximum unrecorded loan remargin or other guarantees, surety obligations and certain other contingencies were as follows:

	March 31, 2014		December 31, 2013
	(In thousands)
Tax Court CCM case (capped at $70.0 million)	$	70,000	$	70,000
Remargin obligations and guarantees for unconsolidated joint venture loans		28,554		28,684
Costs to complete on surety bonds for Company projects		79,258		77,276
Costs to complete on surety bonds for joint venture projects		22,807		22,845
Costs to complete on surety bonds for related party projects		1,614		1,614
Total unrecorded contingent liabilities and commitments	$	202,233	$	200,419

On May 10, 2011, we entered into a $75.0 million, secured letter of credit facility. At December 31 2013, there were no letters of credit outstanding. In February 2014, this facility was replaced with the Revolver, under which up to $62.5 million of letters of credit may be issued. At March 31, 2014, there were no letters of credit outstanding.

We provide surety bonds that guarantee completion of certain infrastructure serving our homebuilding projects. At March 31, 2014, there were $79.3 million of costs to complete in connection with $169.5 million of surety bonds issued. At December 31, 2013, there were $77.3 million of costs to complete in connection with $169.7 million of surety bonds issued.

We also provided indemnification for bonds issued by certain unconsolidated joint ventures and other related party projects in which we have no ownership interest. At March 31, 2014, there were $22.8 million of costs to complete in connection with $63.3 million of surety bonds issued for unconsolidated joint venture projects, and $1.6 million of costs to complete in connection with $4.9 million of surety bonds issued for related party projects. At December 31, 2013, there were $22.8 million of costs to complete in connection with $63.7 million of surety bonds issued for unconsolidated joint venture projects, and $1.6 million of costs to complete in connection with $4.9 million of surety bonds issued for related party projects.

Certain of our homebuilding projects utilize community facility district, metro-district and other local government bond financing programs to fund acquisition or construction of infrastructure improvements. Interest and principal on these bonds are typically paid from taxes and assessments levied on homeowners following the closing of new homes in the project. Occasionally, we enter into credit support arrangements requiring us to pay interest and principal on these bonds if the taxes and assessments levied on landowners and/or homeowners are insufficient to cover such obligations. Furthermore, reimbursement of these payments to us is dependent on the district or local government’s ability to generate sufficient tax and assessment revenues from the new homes. At March 31, 2014 and December 31, 2013, in connection with a credit support arrangements, there was $8.8 million and $8.6 million, respectively, reimbursable to us from certain agencies in Colorado and, accordingly, were recorded in inventory as a recoverable project cost.

43

We also pay certain fees and costs associated with the construction of infrastructure improvements in homebuilding projects that utilize these district bond financing programs. These fees and costs are typically reimbursable to us from, and therefore dependent on, bond proceeds or taxes and assessments levied on landowners and/or homeowners. At March 31, 2014 and December 31, 2013, in connection with certain funding arrangements, there was $13.1 million and $13.1 million, respectively, reimbursable to us from certain agencies, including $11.9 million and $11.9 million, respectively, from metro-districts in Colorado and, accordingly, recorded these in inventory as a recoverable project cost. In addition, if the bond proceeds or tax and assessment revenues are not sufficient to cover our obligations and/or reimburse us, these amounts might not be recoverable.

Until bond proceeds or tax and assessment revenues are sufficient to cover our obligations and/or reimburse us, our responsibility to make interest and principal payments on these bonds or pay fees and costs associated with the construction of infrastructure improvements could be prolonged and significant.

In December 2011, Vistancia, LLC, a consolidated joint venture, sold its remaining interest in an unconsolidated joint venture (the “Vistancia Sale”). As a condition of the Vistancia Sale, and the purchase of the non-controlling member’s remaining interest in Vistancia, LLC, we effectively remain a 10% guarantor on certain community facility district bond obligations to which we must meet a minimum calculated tangible net worth; otherwise, we are required to fund collateral to the bond issuer. At March 31, 2014 and December 31, 2013, we exceeded the minimum tangible net worth requirement.

RELATED PARTY TRANSACTIONS

In January 2014, we entered into a purchase and sale agreement to acquire undeveloped land in Northern California. Consideration included $4.4 million cash, assumption of a $1.3 million liability, and future revenue participation payments (the “RAPA”). The RAPA is calculated at 11% of gross revenues from home closings, payable quarterly, and capped at $19.6 million. The RAPA liability, based on a third-party real estate appraisal, is estimated to be $19.6 million. As the transaction was with a related party under common control, the $25.3 million of consideration was recorded as an equity distribution to our owners.

In February 2014, we entered into a purchase and sale agreement to sell land in Southern California for $1.0 million to a related party under common control. The $0.9 million of net sales proceeds received in excess of the net book value of the land sold was recorded as an equity contribution.

JFSCI provides corporate services to us, including management, legal, tax, information technology, risk management, facilities, accounting, treasury and human resources. For the three months ended March 31, 2014 and 2013, general and administrative expenses included $6.3 million and $5.2 million, respectively, for corporate services provided by JFSCI.

We obtain workers compensation insurance, commercial general liability insurance and insurance for completed operations losses and damages with respect to our homebuilding operations from affiliate and unrelated third party insurance providers. Some of these policies are purchased by affiliate entities and we pay premiums to these affiliates for the coverages provided by these third party and affiliate insurance providers. Policies covering these risks are written at various coverage levels but include a large self-insured retention or deductible. We have retention liability insurance from affiliate entities to insure these large retentions or deductibles. For the three months ended March 31, 2014 and 2013, amounts paid to affiliates for this retention insurance coverage were $5.1 million and $3.9 million, respectively.

CRITICAL ACCOUNTING POLICIES

We believe no significant changes occurred to our critical accounting policies during the three months ended March 31, 2014, as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations for December 31, 2013 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

NEW ACCOUNTING PRONOUNCEMENTS

See Note 2 of our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for a discussion of new accounting pronouncements applicable to the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk primarily from interest rate fluctuations. Historically, we have incurred fixed-rate andvariable-rate debt. For fixed-rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not earnings or cash flow. Conversely, for variable-rate debt, changes in interest rates generally do not affect the fair market value of the debt but do affect earnings and cash flow. We did not utilize swaps, forward or option contracts on interest rates or commodities, or other types of derivative financial instruments at or during the three months ended March 31, 2014. We have not entered into and currently do not hold derivatives for trading or speculative purposes. As we do not have an obligation to prepay fixed-rate debt prior to maturity, and we do not currently have a significant amount of variable-rate debt outstanding, interest rate risk and changes in fair market value should not have a significant impact on such debt until we refinance.

44

In February 2014, we replaced our $75.0 million secured letter of credit facility with the $125.0 million Revolver, which bears interest, at the Company’s option, either at (i) a daily Eurocurrency base rate as defined in the Credit Agreement, plus a margin of 2.75%, or (ii) a Eurocurrency rate as defined in the Credit Agreement, plus a margin of 2.75% and matures March 1, 2016. Borrowing availability is determined by a borrowing base formula and we are subject to financial covenants, including minimum net worth and leverage and interest coverage ratios. If we do not maintain compliance with these financial covenants, the Revolver converts to an 18-month amortizing term loan. At March 31, 2014, we were in compliance with these covenants.

Other than the Revolver described above, we believe no significant changes to our market risks occurred during the three months ended March 31, 2014, as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March, 31, 2014. The term “disclosure controls and procedures,” as defined inRules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Based on the evaluation of our disclosure controls and procedures as of March 31, 2014, our Chief Executive Officer and Chief Financial Officer have concluded, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Internal Control Over Financial Reporting

We made no change in internal control over financial reporting during the first quarter of 2014 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Controls

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all of our control issues and instances of fraud, if any, have been detected.

FORWARD-LOOKING STATEMENTS

Some of the statements in this Quarterly Report on Form 10-Q, contain forward-looking statements and information relating to us that are based on beliefs of management as well as assumptions made by, and information currently available to, us. When used in this document, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and “project” and similar expressions, as they relate to us are intended to identify forward-looking statements. These statements reflect our current views with respect to future events, are not guarantees of future performance and involve risks and uncertainties difficult to predict. Further, certainforward-looking statements are based upon assumptions of future events that may not prove to be accurate.

See the “Risk Factors” section included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for a description of risk factors that could significantly affect our financial results. In addition, the following factors could cause actual results to differ materially from results that may be expressed or implied by such forward-looking statements. These factors include, among other things:

• changes in employment levels;

• changes in availability of financing for homebuyers;

• changes in interest rates;

• changes in consumer confidence;

45

• changes in levels of new and existing homes for sale;

• changes in demographic trends;

• changes in housing demands;

• changes in home prices;

• elimination or reduction of tax benefits associated with owning a home;

• litigation risks associated with home warranty and construction defect and other claims; and

• various other factors, both referenced and not referenced in this Quarterly Report on Form 10-Q.

Many of these factors are macroeconomic in nature and are, therefore, beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results, performance or achievements may vary materially from those described in this Quarterly Report on Form 10-Q as anticipated, believed, estimated, expected, intended, planned or projected. Except as required by law, we neither intend nor assume any obligation to revise or update theseforward-looking statements, which speak only as of their dates.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

We record a reserve for potential legal claims and regulatory matters when they are probable of occurring and a potential loss is reasonably estimable. We accrue for these matters based on facts and circumstances specific to each matter and revise these estimates when necessary. In such cases, there may exist an exposure to loss in excess of amounts accrued. In view of the inherent difficulty of predicting the outcome of legal claims and related contingencies, we generally cannot predict their ultimate resolution, related timing or eventual loss. While their outcome cannot be predicted with certainty, we believe we have appropriately reserved for these claims or matters. Other than the CCM matter described in “Liquidity and Capital Resources” and in Note 13 to our consolidated financial statements, we do not believe we are subject to any material legal claims and regulatory matters at this time. However, to the extent liabilities arising from the ultimate resolution of legal claims or regulatory matters exceed their recorded reserves, we could incur additional charges that could be material.

ITEM 1A. RISK FACTORS

There were no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

46

ITEM 6. EXHIBITS

4.1	Third Supplemental Indenture, dated February 25, 2014, among Shea Homes Limited Partnership, and Shea Homes Funding Corp., as issuers, the guarantors party thereto, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.6 to the Company’s Annual Report on form 10-K filed with the SEC on March 17, 2014(File No. 333-177328)).
10.1	Credit Agreement dated as of February 20, 2014, by and among Shea Homes Limited Partnership, the lenders from time to time party thereto, and U.S. Bank National Association as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 26, 2014 (File No. 333-177328))
10.2	Amended and Restated Security Agreement dated as of February 20, 2014 among Shea Homes Limited Partnership, Shea Homes Funding Corp., the Grantors identified therein, U.S. Bank National Association as administrative agent, and Wells Fargo Bank, National Association as collateral agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 26, 2014 (File No. 333-177328))
31.1	Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from Shea Homes Limited Partnership’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Income and Comprehensive Income, (iii) Unaudited Condensed Consolidated Statements of Changes in Equity, (iv) Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements. Pursuant to Rule 406T of RegulationS-T, the Interactive Data Files on Exhibit 101 hereto are deemed furnished and not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

47

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SHEA HOMES LIMITED PARTNERSHIP
		(Registrant)
Dated: May 12, 2014	By:	/S/ ROBERTO F. SELVA
		Roberto F. Selva
		Chief Executive Officer
		(Principal Executive Officer)
Dated: May 12, 2014	By:	/S/ ANDREW H. PARNES
		Andrew H. Parnes
		Chief Financial Officer
		(Principal Financial Officer)

48