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WLH > SEC Filings for WLH > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for WILLIAM LYON HOMES

Form 10-Q for WILLIAM LYON HOMES


9-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

WILLIAM LYON HOMES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The Company is one of the largest Western U.S. regional homebuilders. Headquartered in Newport Beach, California, the Company is primarily engaged in the design, construction, marketing and sale of single-family detached and attached homes in California, Arizona, Nevada and Colorado. The Company's core markets include Orange County, Los Angeles, San Diego, the San Francisco Bay Area, Phoenix, Las Vegas and Denver. The Company has a distinguished legacy of more than 55 years of homebuilding operations, over which time it has sold in excess of 75,000 homes. For the six months ended June 30, 2013, or the 2013 Period, the Company had revenues from homes sales of $197.1 million, a 129% increase from $86.0 million for the six months ended June 30, 2012, which includes the "Predecessor" entity from January 1, 2012 through February 24, 2012, and the "Successor" entity from February 25, 2012 through June 30, 2012, or the 2012 Period, on a consolidated basis, which includes results from all five reportable operating segments. The Company had net new home orders of 721 homes in the 2013 period, a 16% increase from 623 in the 2012 period, and the average sales price for homes closed increased 34% to $321,500 in the 2013 period from $239,700 in the 2012 period.

Chapter 11 Reorganization

On December 19, 2011, William Lyon Homes, or Parent, and certain of its direct and indirect wholly-owned subsidiaries filed voluntary petitions, or the Chapter 11 Petitions, in the U.S. Bankruptcy Court for the District of Delaware, or the Bankruptcy Court, to seek approval of the Prepackaged Joint Plan of Reorganization, or the Plan, of Parent and certain of its subsidiaries. Prior to filing the Chapter 11 Petitions, Parent's wholly-owned subsidiary, William Lyon Homes, Inc., or California Lyon, was in default under its prepetition loan agreement with ColFin WLH Funding, LLC and certain other lenders, or the Prepetition Term Loan Agreement, due to its failure to comply with certain financial covenants in the Prepetition Term Loan Agreement. In addition, the Company became increasingly uncertain of its ability to repay or refinance its then outstanding 75/8% Senior Notes when they matured on December 15, 2012. Beginning in April 2010, California Lyon entered into a series of amendments and temporary waivers with the lenders under the Prepetition Term Loan Agreement related to these defaults, which prevented acceleration of the indebtedness outstanding under the Prepetition Term Loan Agreement and enabled the Company to negotiate a financial reorganization to be implemented through the bankruptcy process with its key constituents prior to the Chapter 11 Petitions. The Chapter 11 Petitions were jointly administered under the caption In re William Lyon Homes, et al., Case No. 11-14019, or the Chapter 11 Cases. The sole purpose of the Chapter 11 Cases was to restructure the debt obligations and strengthen the balance sheet of the Parent and certain of its subsidiaries. On February 10, 2012, the Bankruptcy Court confirmed the Plan. On February 25, 2012, Parent and its subsidiaries consummated the principal transactions contemplated by the Plan.

Basis of Presentation

The accompanying condensed consolidated financial statements included herein have been prepared under U.S. Generally Accepted Accounting Principles, or U.S. GAAP, and the rules and regulations of the Securities and Exchange Commission, or the SEC, and are presented on a going concern basis, which assumes the Company will be able to operate in the ordinary course of its business and realize its assets and discharge its liabilities for the foreseeable future.

Fresh Start Accounting

In preparing the condensed consolidated financial statements for the Predecessor, we applied ASC Topic 852 Reorganization, or ASC 852, which requires that the financial statements for periods subsequent to the reorganization filing distinguish transactions and events that were directly associated with the reorganization from the ongoing operations of the business. Accordingly, professional fees associated with the Plan, interest income earned during the reorganization process and certain gains and losses resulting from reorganization of our business have been reported separately as reorganization items. In addition, interest expense has been reported only to the extent that it was paid or expected to be paid during the reorganization process or that it was probable that it would be an allowed priority, secured, or unsecured claim under the Plan.

Upon emergence from the reorganization process, we adopted fresh start accounting in accordance with ASC 852. The adoption of fresh start accounting results in our becoming a new entity for financial reporting purposes. Accordingly, the condensed consolidated financial statements on or after February 25, 2012 are not comparable to the condensed consolidated financial statements prior to that date.


Fresh start accounting requires resetting the historical net book value of assets and liabilities to fair value by allocating the entity's reorganization value to its assets pursuant to Accounting Standards Codification Topic 805, Business Combinations, or ASC 805, and Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, or ASC 820. The excess reorganization value over the fair value of tangible and identifiable intangible assets is recorded as goodwill on the Consolidated Balance Sheet. Deferred taxes are determined in conformity with Accounting Standards Codification Topic 740, Income Taxes, or ASC 740.

Results of Operations

The U.S. housing market continues to improve from the cyclical low points reached during the 2008-2009 national recession. In 2011, early signs of a recovery began to materialize in many markets around the country as a result of an improving macroeconomic backdrop and excellent housing affordability. Historically, strong housing markets have been associated with great affordability, a healthy domestic economy, positive demographic trends such as population growth and household formation, falling mortgage rates, increases in renters that qualify as homebuyers and locally based dynamics such as housing demand relative to housing supply. Many markets across the U.S. are exhibiting most of these positive characteristics.

In the six months ended June 30, 2013, the Company delivered 613 homes, with an average selling price of approximately $321,500, and recognized home sales revenues and total revenues of $197.1 million and $212.3 million, respectively. The Company has experienced significant operating momentum since the beginning of 2012, during which time a variety of key housing, employment and other related economic statistics in our markets have increasingly demonstrated signs of recovery. This rebound in market conditions, when combined with the Company's disciplined operating strategy, has resulted in six consecutive quarters of period over period growth in net new home orders, home closings and unit backlog. The improving market conditions and increase in pricing is reflected in our average sales price of homes in backlog of $404,600 at June 30, 2013 which is 26% higher than the average sales price of homes closed for the six months ended June 30, 2013 of $321,500.

As of June 30, 2013, the Company is selling homes in 25 communities and had a consolidated backlog of 511 sold but unclosed homes, with an associated sales value of $206.8 million, representing a 27% and 96% increase in units and dollars, respectively, as compared to the backlog at June 30, 2012. The Company believes that the attractive fundamentals in its markets, its leading market share positions, its long-standing relationships with land developers, its significant land supply and its focus on providing the best possible customer experience, positions the Company to capitalize on meaningful growth as the U.S. housing market continues to rebound.

The Company benefits from a sizeable and well-located lot supply. As of June 30, 2013, the Company and its consolidated joint ventures owned 10,576 lots, all of which are entitled, and had options to purchase an additional 3,285 lots. The Company's lot supply reflects its balanced approach to land investment. The Company has a diverse mix of finished lots available for near-term homebuilding operations and longer-term strategic land positions to support future growth. The Company believes that its current inventory of owned and controlled lots is sufficient to supply the vast majority of its projected future home closings for the next three years and a portion of future home closings for a multi-year period thereafter. The Company's meaningful supply of owned lots allows it to be selective in identifying new land acquisition opportunities, with a primary focus on optioning and acquiring land to drive closings, revenues and earnings growth in 2015 and beyond, and largely insulates it from the heavy competition for near-term finished lots.

The Company also benefits from an attractive book value basis in its inventory, which was adjusted to fair value in February 2012 in conjunction with the restructuring and in accordance with fresh start accounting requirements. To facilitate the adoption of fresh start accounting, the Company engaged a third-party valuation firm to assist in a comprehensive assessment of the Company's enterprise value and the allocation of value to its assets and liabilities. In the assessment, the Company generally utilized assumptions for future home sales paces and prices based upon then-prevailing market conditions in late 2011, which represented conditions near the trough of the recent U.S. housing downturn. Homebuilding gross margin percentage and adjusted homebuilding gross margin percentage was 18.8% and 25.5%, respectively, for the six months ended June 30, 2013, as compared to 14.3% and 21.9%, respectively, for the six months ended June 30, 2012. The increase in gross margins is primarily related to an increase in net sales prices during the period and an increase in absorption, which decreases certain project related costs. The increase in gross margins is also attributed to the impact of fresh start accounting which resulted in a net decrease to the cost basis of our properties, which subsequently increased gross margins.

The Company acquired Village Homes of Denver, Colorado on December 7, 2012, which marked the Company's entry into the Colorado market and the beginning of the Colorado segment. There were no operations in our Colorado division for the period from January 1, 2012 through February 24, 2012, and the period from February 25, 2012 through June 30, 2012, therefore year over year comparisons are not meaningful ("N/M") as indicated in the comparative tables below.


Comparisons of the Three Months Ended June 30, 2013 to June 30, 2012

Revenues from homes sales increased 122% to $120.6 million during the three months ended June 30, 2013 compared to $54.3 million during the three months ended June 30, 2012. The increase is primarily due to a 49% increase in homes closed to 345 homes during the 2013 period compared to 231 homes during the 2012 period, along with an increase in the average sales price of homes closed to $349,700 in the 2013 period compared to $234,800 in the 2012 period. On a same store basis, which represents projects that were open during the comparable periods, average sales price has increased 21% to $337,300 in the 2013 period, from $278,500 in the 2012 period. The number of net new home orders for the three months ended June 30, 2013 increased 19% to 360 homes from 302 homes for the three months ended June 30, 2012.

The average number of sales locations of the Company increased to 24 locations for the three months ended June 30, 2013 compared to 19 for the three months ended June 30, 2012 due to the addition of the Colorado division which added five new communities, and the addition of three communities in Arizona, offset by the close out of communities in California and Nevada.

                                     Three Months Ended
                                          June 30,                Increase (Decrease)
                                     2013            2012        Amount             %
   Number of Net New Home Orders
   Southern California                  104             65             39             60 %
   Northern California                   24             52            (28 )          (54 %)
   Arizona                              137            120             17             14 %
   Nevada                                64             65             (1 )           (2 %)
   Colorado                              31             -              31            N/M

   Total                                360            302             58             19 %

   Cancellation Rate                     17 %           15 %            2 %

The weekly average sales rates remained consistent at 1.2 sales per project during the 2013 period and the 2012 period. The increase in net new homes orders is driven by the addition of our Colorado division, the 60% improvement in Southern California, and 14% improvement in Arizona. Total orders in Northern California and Nevada decreased due to a 50% and 17% decrease, respectively, in average sales locations, however sales per location decreased only 8% in Northern California from 13.0 in the 2012 period to 12.0 in the 2013 period and increased 18% in Nevada from 10.8 in the 2012 period to 12.8 in the 2013 period. In Arizona, sales per location in the 2012 period were exceptionally high at 40.0, and have returned to a more normalized rate of 22.8 in the 2013 period. The increase in net new home orders positively impacts the number of homes in backlog, which are homes that will close in future periods. As new home orders and backlog increase, it has a positive impact on revenues and cash flow in future periods.

Cancellation rates during the 2013 period increased to 17% from 15% during the 2012 period, which is common in an increasing market.

--------------------------------------------------------------------------------
                                        Three Months Ended
                                             June 30,                Increase (Decrease)
                                       2013             2012      Amount              %
 Average Number of Sales Locations
 Southern California                         6              6          -                  0 %
 Northern California                         2              4          (2 )             (50 %)
 Arizona                                     6              3           3               100 %
 Nevada                                      5              6          (1 )             (17 %)
 Colorado                                    5             -            5               N/M

Total 24 19 5 26 %

The average number of sales locations for the Company increased to 24 locations for the three months ended June 30, 2013 compared to 19 for the three months ended June 30, 2012. Northern California and Nevada decreased by two and one sales locations, respectively, in the 2013 period compared to the 2012 period, while Arizona increased by three sales locations and Southern California remained consistent in the 2013 period compared to the 2012 period. For the three months ended June 30, 2013, the Colorado division had five sales locations, with no comparable amount in the 2012 period.

                                      June 30,           Increase (Decrease)
                                   2013      2012       Amount             %
             Backlog (units)
             Southern California     105        98             7              7 %
             Northern California      52        79           (27 )          (34 %)
             Arizona                 177       147            30             20 %
             Nevada                  114        79            35             44 %
             Colorado                 63        -             63            N/M

             Total                   511       403           108             27 %

The Company's backlog at June 30, 2013 increased 27% from 403 units at June 30, 2012 to 511 units at June 30, 2013. The increase is primarily attributable to an increase in net new home orders during the period driven by the Southern California and Arizona divisions, which had a 60% and 14% increase, respectively, in net new home orders, which contributed to a 7% and 20% increase, respectively, in backlog, as well as the addition of our Colorado division. The increase in backlog at June 30, 2013 reflects an increase in the number of homes closed to 345 during the three months ended June 30, 2013 from 231 during the three months ended June 30, 2012, and a 19% increase in total net new order activity to 360 homes during the three months ended June 30, 2013 from 302 homes during the three months ended June 30, 2012. All divisions continue their strong performance due to increased homebuyer confidence and demand.

                                      June 30,               Increase (Decrease)
                                 2013          2012           Amount            %
                                              (dollars in thousands)
         Backlog (dollars)
         Southern California   $  78,541     $  43,121     $     35,420          82 %
         Northern California      20,644        23,011           (2,367 )       (10 %)
         Arizona                  46,461        24,808           21,653          87 %
         Nevada                   35,302        14,791           20,511         139 %
         Colorado                 25,809            -            25,809         N/M

         Total                 $ 206,757     $ 105,731     $    101,026          96 %

The dollar amount of backlog of homes sold but not closed as of June 30, 2013 was $206.8 million, up 96% from $105.7 million as of June 30, 2012. The increase during this period reflects a 27% increase in the number of homes in backlog to 511 homes as of June 30, 2013 compared to 403 homes as of June 30, 2012. In addition, the increase reflects an increase in average sales prices for new home orders, and the addition of our Colorado division. The Company experienced an increase of 54% in the average sales price of homes in backlog to $404,600 as of June 30, 2013 compared to $262,400 as of June 30, 2012. The increase is driven by a higher price point of our actively selling projects in Arizona in three new communities that opened in the second quarter of 2012, and two new communities in Southern California that opened in the first half of 2013, as well as an average sales price of homes in backlog in Colorado of $409,700 with no comparable amount in the three months ended June 30, 2012. The increase in the dollar amount of backlog of homes sold but not closed as described above generally results in an increase in operating revenues in the subsequent period as compared to the previous period.


In Southern California, the dollar amount of backlog increased 82% to $78.5 million as of June 30, 2013 from $43.1 million as of June 30, 2012, which is attributable to a 70% increase in the average sales price of homes in backlog to $748,000 as of June 30, 2013 compared to $440,000 as of June 30, 2012, and a 60% increase in net new home orders to 104 for the three months ended June 30, 2013 compared to 65 homes for the three months ended June 30, 2012. In Southern California, the cancellation rate decreased to 8% for the three months ended June 30, 2013 from 20% for the three months ended June 30, 2012.

In Northern California, the dollar amount of backlog decreased 10% to $20.6 million as of June 30, 2013 from $23.0 million as of June 30, 2012, which is attributable to a 36% increase in the average sales price of homes in backlog to $397,000 as of June 30, 2013 compared to $291,300 as of June 30, 2012, offset by an 34% decrease in the number of units in backlog to 52 as of June 30, 2013 from 79 as of June 30, 2012, along with a 54% decrease in net new home orders in Northern California to 24 homes for the three months ended June 30, 2013 compared to 52 homes for the three months ended June 30, 2012. In Northern California, the cancellation rate decreased to 17% for the three months ended June 30, 2013 from 26% for the three months ended June 30, 2012.

In Arizona, the dollar amount of backlog increased 87% to $46.5 million as of June 30, 2013 from $24.8 million as of June 30, 2012, which is attributable to a 20% increase in the number of units in backlog to 177 as of June 30, 2013 from 147 as of June 30, 2012, and a 56% increase in the average sales price of homes in backlog to $262,500 as of June 30, 2013 compared to $168,800 as of June 30, 2012, as well as a 14% increase in net new home orders in Arizona to 137 homes during the three months ended June 30, 2013 compared to 120 homes during the three months ended June 30, 2012. In Arizona, the cancellation rate increased to 20% for the three months ended June 30, 2013 from 9% for the three months ended June 30, 2012.

In Nevada, the dollar amount of backlog increased 139% to $35.3 million as of June 30, 2013 from $14.8 million as of June 30, 2012, which is attributable to a 44% increase in the number of units in backlog to 114 as of June 30, 2013 from 79 as of June 30, 2012, offset by a 2% decrease in net new home orders in Nevada to 64 homes during the three months ended June 30, 2013 compared to 65 homes during the three months ended June 30, 2012, and a 65% increase in the average sales price of homes in backlog to $309,700 as of June 30, 2013 compared to $187,200 as of June 30, 2012. In Nevada, the cancellation rate increased to 19% for the three months ended June 30, 2013 from 11% for the three months ended June 30, 2012.

In Colorado, the dollar amount of backlog was $25.8 million as of June 30, 2013, with no comparable amount as of June 30, 2012.

                                  Three Months Ended
                                       June 30,                Increase (Decrease)
                                 2013            2012         Amount             %
      Number of Homes Closed
      Southern California             77              49            28             57 %
      Northern California             22              29            (7 )          (24 %)
      Arizona                        124             119             5              4 %
      Nevada                          72              34            38            112 %
      Colorado                        50              -             50            N/M

      Total                          345             231           114             49 %


During the three months ended June 30, 2013, the number of homes closed increased 49% to 345 in the 2013 period from 231 in the 2012 period. The increase in home closings is primarily attributable to an increase in beginning backlog for the period of 50% to 498 units at March 31, 2013 compared to 332 units at March 31, 2012. There was a 57% increase in Southern California to 77 homes closed in the 2013 period compared to 49 homes closed in the 2012 period, a 4% increase in homes closed in Arizona to 124 in the 2013 period from 119 in the 2012 period, and a 112% increase in homes closed in Nevada to 72 in the 2013 period compared to 34 in the 2012 period, offset by a 24% decrease in Northern California to 22 homes closed in the 2013 period compared to 29 homes closed in the 2012 period. Colorado had 50 home closings during the 2013 period, with no comparable activity in the 2012 period.

                                 Three Months Ended
                                      June 30,               Increase (Decrease)
                                  2013          2012          Amount            %
                                              (dollars in thousands)
         Home Sales Revenue
         Southern California   $   44,121     $ 19,212     $     24,909         130 %
         Northern California        7,629       10,180           (2,551 )       (25 %)
         Arizona                   30,301       17,689           12,612          71 %
         Nevada                    17,740        7,170           10,570         147 %
         Colorado                  20,857           -            20,857         N/M

         Total                 $  120,648     $ 54,251     $     66,397         122 %

The increase in homebuilding revenue of 122% to $120.6 million for the 2013 period from $54.3 million for the 2012 period is primarily attributable to a 49% increase in the number of homes closed to 345 during the 2013 period from 231 in the 2012 period, along with a 49% increase in the average sales price of homes closed to $349,700 during the 2013 period from $234,800 during the 2012 period, as well as the addition of our Colorado division. The increase in average home sales price resulted in a $39.6 million increase in revenue, as well as a $26.8 million increase in revenue attributable to a 49% increase in the number of homes closed.

                                         Three Months Ended
                                              June 30,               Increase (Decrease)
                                         2013          2012           Amount            %
 Average Sales Price of Homes Closed
 Southern California                   $ 573,000     $ 392,100     $    180,900          46 %
 Northern California                     346,800       351,000           (4,200 )        (1 %)
 Arizona                                 244,400       148,600           95,800          64 %
 Nevada                                  246,400       210,900           35,500          17 %
 Colorado                                417,100            -           417,100         N/M

 Total                                 $ 349,700     $ 234,800     $    114,900          49 %


The average sales price of homes closed for the 2013 period increased primarily due to increasing price points of our actively selling projects to projects available to first time buyers or first time "move up" buyers. In the Southern California segment, the overall average sales price increase is primarily due to 21 closings in three new communities that opened in the first half of 2013 with an average sales price of $834,900. The increase in average sales prices for the period was due to new projects that were released during the latter half of 2012 and first half of 2013 with an average sales price of $354,100, which is above the prior period overall average of $234,800. On a same store basis, average sales prices increased 21% from $278,500 in the second quarter of 2012 to $337,300 in the second quarter of 2013.

                                                Three Months Ended
                                                     June 30,
                                              2013               2012            Increase (Decrease)
Homebuilding Gross Margin Percentage
Southern California                              23.9 %           13.3 %                         10.6 %
. . .
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