8-K

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

Current Report

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): October 31, 2012 

SHEA HOMES LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

CALIFORNIA	333-177328	95-4240219
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

655 Brea Canyon Road, Walnut, California 91789

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (909) 594-9500

Not Applicable

(Former name or former address, if changed since last report):

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition

On October 31, 2012, Shea Homes Limited Partnership issued a press release announcing its results of operations for the three and nine months ended September 30, 2012. A copy of the press release is furnished as Exhibit 99.1 to this report and is incorporated herein.

The information contained in this Item 2.02 and in the accompanying Exhibit 99.1 attached hereto shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of the Shea Homes Limited Partnership under the Securities Act of 1933, as amended (the “Securities Act”) or the Exchange Act.

Item 9.01. Financial Statements and Exhibits

The information contained in this Item 9.01 and in the accompanying Exhibit 99.1 attached hereto shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of Shea Homes Limited Partnership under the Securities Act or the Exchange Act.

(d) Exhibits

Exhibit Number	Description
99.1	Press Release dated October 31, 2012

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 hereunto duly authorized.

SHEA HOMES LIMITED PARTNERSHIP
By:	/s/ Andrew H. Parnes
Name:	Andrew H. Parnes
Title:	Chief Financial Officer

Date: October 31, 2012

Exhibit Index

Exhibit Number	Description
99.1	Press Release dated October 31, 2012

EX-99.1

Exhibit 99.1

Shea Homes Reports Third Quarter 2012 Results

Walnut, Calif., October 31, 2012

Shea Homes, one of America’s largest private homebuilders, today reported results for the third quarter ended September 30, 2012.

Three Months Ended 9/30/12 Highlights, Commentary and Comparisons to Three Months Ended 9/30/11

• Net income attributable to Shea Homes was $8.3 million compared to $2.1 million, due primarily to a $7.5 million improvement in gross margin and an $8.8 million gain on sale of investments, offset by a $6.0 million increase in SG&A expense and a $3.6 million increase in income tax expense.

• Home sales were 530 compared to 288, an 84% increase. Active selling communities averaged 63 and 79 in the third quarter of 2012 and 2011, respectively.

• Home sales per community were 8.4 homes, or 2.8 per month, in 2012 compared to 3.6 homes, or 1.2 per month, in 2011, a 133% increase.

• Cancellation rate was 13% compared to 27%.

• Backlog units at September 30, 2012 were 1,204 compared to 682 at September 30, 2011, a 77% increase.

• Backlog sales value was $507.2 million at September 30, 2012 compared to $295.1 million at September 30, 2011, a 72% increase.

• The average selling price in backlog was $421,000 at September 30, 2012 compared to $433,000 at September 30, 2011, a 3% decrease.

• Total revenues were $146.4 million compared to $157.3 million, a 7% decrease.

• House revenues were $132.2 million* compared to $152.7 million*, a 13% decrease due to a reduction in new house deliveries and a lower average selling price.

• Homes closed were 328 compared to 351, a 7% decrease. Despite a 55% increase in sales year to date, the decrease in deliveries resulted from longer cycle times (sale to close) and reduced levels of speculative inventory compared to last year.

• Average selling price of homes closed was $403,000 compared to $435,000, a 7% decrease primarily attributable to a shift to lower-priced homes in our Southern California and San Diego segments, partially offset by price increases in several communities in our Northern California segment and a shift to higher-priced homes in our Mountain West segment.

• Total gross margin was 21.3% compared to 15.0%, a 630 basis points (bp’s) increase. There were no inventory impairments in 2012 or 2011.

• House gross margin was 18.7%* compared to 17.3%*, a 140 bp’s increase primarily attributable to price increases in our Northern California segment and increased margins on land sales in our Mountain West segment.

• SG&A expense was $26.3 million (18.0% of revenues) compared to $20.3 million (12.9% of revenues), the increase primarily attributable to higher legal expenses associated with our completed contract method tax court case and increased incentive compensation costs, offset by lower model home amortization costs and direct selling expenses from decreased closings.

• Interest incurred was $16.8 million compared to $16.7 million in 2011, while interest expense was $4.6 million versus $4.3 million, a 6% increase resulting from a lower level of qualified inventory.

• Other income, net was $8.8 million compared to $0.6 million and attributable to an $8.8 million gain on the sale of investments in 2012.

• Adjusted EBITDA was $19.7 million* versus $19.0 million* last year.

Page 1

• Cash, restricted cash and investments at September 30, 2012 was $233.3 million compared to $314.5 million at December 31, 2011 (see Condensed Consolidated Statements of Cash Flows on page 6).

Bert Selva, President and CEO, stated: “We are pleased to see positive order activity continue into the third quarter, a period which normally experiences a seasonal slowdown. The continued order improvements were experienced across all of our markets and resulted in a backlog level nearly twice that of the prior year third quarter. This spike in backlog should position the Company for a solid fourth quarter and finish to 2012.”

Nine Months Ended 9/30/12 Highlights, Commentary and Comparisons to Nine Months Ended 9/30/11

• Net loss attributable to Shea Homes was $4.2 million compared to $107.3 million, due primarily to an $88.3 million loss on debt extinguishment in May 2011. In 2012, we saw a $31.9 million improvement in gross margin and an $8.8 million gain on sale of investments, offset by a $7.2 million loss on actuarial adjustment (see below), a $4.1 million increase in interest expense, a $9.5 million increase in SG&A expense and a $4.8 million increase in income tax expense.

• Home sales were 1,616 compared to 1,044, a 55% increase. Active selling communities averaged 66 and 78 in 2012 and 2011, respectively.

• Home sales per community were 24.5 homes, or 2.7 per month, in 2012 compared to 13.4 homes, or 1.5 per month, in 2011, an 83% increase.

• Cancellation rate was 14% compared to 21%.

• Total revenues were $384.5 million compared to $346.3 million, an 11% increase.

• House revenues were $360.2 million* compared to $335.0 million*, an 8% increase due to an increase in new home deliveries.

• Homes closed were 873 compared to 806, an 8% increase. The increase in deliveries is less than the increase in year to date sales due to larger cycle times (sales to close) compared to last year.

• Average selling price of homes closed was $413,000 compared to $416,000, a 1% decrease primarily attributable to a shift to lower-priced homes in our Southern California and San Diego segments, partially offset by price increases in several communities in our Northern California segment and a shift to higher-priced homes in our Mountain West segment.

• Total gross margin was 19.8% compared to 12.8%, a 700 bp’s increase. There were no inventory impairments in 2012 compared to $10.3 million in 2011.

• House gross margin was 19.6%* compared to 17.5%*, a 210 bp’s increase primarily attributable to price increases in our Northern California segment and increased margins on land sales in our Mountain West segment.

• SG&A expense was $65.7 million (17.1% of revenues) compared to $56.2 million (16.2% of revenues), the increase primarily attributable to higher direct selling costs associated with increased house revenues, higher legal expenses associated with our completed contract method tax court case and increased incentive compensation costs, offset by lower model home amortization costs.

• Interest incurred was $50.1 million compared to $53.9 million and primarily attributable to a lower effective interest rate (8.9%) associated with our $750.0 million senior secured notes issued in May 2011 compared to our previously outstanding indebtedness (10.0%). Interest expense was $16.8 million compared to $12.6 million, a 33% increase resulting from a lower level of qualified inventory.

• Other income, net was $2.7 million compared to $3.1 million. In 2012, other income consisted of an $8.8 million gain on sale of investments, partially offset by a $7.2 million loss on an actuarial adjustment to our loss reserves on completed operations policies that were reinsured in 2009.

• Adjusted EBITDA was $49.0 million* versus $34.9 million*.

• As a result of the Shea Colorado LLC transaction previously disclosed on our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed with the SEC on May 11, 2012, total equity decreased $39.8 million, of which $11.6 million was attributable to SHLP and $28.2 million to non-controlling interests.

* See “Reconciliation of Non-GAAP Financial Measures” beginning on page 9.

Page 2

About Shea Homes

Shea Homes is one of the largest private homebuilders in the nation. Since its founding in 1968, Shea Homes has delivered more than 88,000 homes. Shea Homes builds homes with quality craftsmanship and designs that best fit varied lifestyles and budgets. Over the past several years, Shea Homes has been recognized as a leader in customer satisfaction with a reputation for design, quality and service. For more about Shea Homes and its communities, visit www.sheahomes.com.

The preceding summary of the financial results of Shea Homes Limited Partnership and its subsidiaries does not purport to be complete and is qualified in its entirety by reference to the consolidated financial statements of Shea Homes Limited Partnership and its subsidiaries, available on our website at: http://www.sheahomes.com/investor

This news release contains forward-looking statements and information relating to Shea Homes Limited Partnership and its subsidiaries, such as new home orders, deliveries and expected fourth quarter results, that are based on the beliefs of, as well as assumptions made by, and information currently available to, our management. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and “project” and similar expressions, as they relate to Shea Homes Limited Partnership and its subsidiaries are intended to identify forward-looking statements. These statements reflect our management’s current views with respect to future events, are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Further, certain forward-looking statements are based upon assumptions of future events that may not prove to be accurate. Such statements involve known and unknown risks, uncertainties, assumptions and other factors many of which are out of Shea Homes Limited Partnership’s and its subsidiaries’ control and difficult to forecast that may cause actual results to differ materially from those that may be described or implied. Such factors include but are not limited to: changes in employment levels; changes in the availability of financing for homebuyers; changes in interest rates; changes in consumer confidence; 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 the 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 above, and included in the Company’s filings with the Securities and Exchange Commission, including the Company’s Quarterly Reports on Form 10-Q. 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 as anticipated, believed, estimated, expected, intended, planned or projected. Except as required by law, Shea Homes Limited Partnership and its subsidiaries neither intend nor assume any obligation to revise or update these forward-looking statements, which speak only as of their dates. Shea Homes Limited Partnership and its subsidiaries nonetheless reserve the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this press release. No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.

Contact: Andrew Parnes, CFO @ 909-594-9500 or andy.parnes@sheahomes.com

Page 3

KEY OPERATIONAL AND FINANCIAL DATA

(dollars in thousands)

	At or For the Three Months Ended September 30,									At or For the Nine Months ended September 30,
	2012			2011			Change			2012			2011			Change
	(unaudited)			(unaudited)						(unaudited)			(unaudited)
Operating Data:
Revenues	$	146,421		$	157,300			-7	%	$	384,492		$	346,293			11	%
Gross margin %		21.3	%		15.0	%		630bp’s			19.8	%		12.8	%		700bp’s
Homebuilding revenues (a) *	$	146,174		$	156,974			-7	%	$	383,754		$	345,442			11	%
Homebuilding gross margin % (a) *		21.2	%		14.9	%		630bp’s			19.7	%		12.6	%		710bp’s
House revenues *	$	132,220		$	152,658			-13	%	$	360,238		$	334,975			8	%
House gross margin % *		18.7	%		17.3	%		140bp’s			19.6	%		17.5	%		210bp’s
Adjusted house gross margin % excluding interest in cost of sales *		26.0	%		25.5	%		50bp’s			26.9	%		25.4	%		150bp’s
Inventory impairments	$	—		$	—			—		$	—		$	10,302			-100	%
SG&A expense	$	26,297		$	20,277			30	%	$	65,672		$	56,153			17	%
SG&A % of total revenue		18.0	%		12.9	%		510bp’s			17.1	%		16.2	%		90bp’s
Net income (loss) attributable to Shea Homes	$	8,330		$	2,098			297	%	$	(4,182	)	$	(107,296	)		-96	%
Adjusted EBITDA (b) *	$	19,672		$	19,007			3	%	$	48,997		$	34,947			40	%
Interest incurred	$	16,768		$	16,661			1	%	$	50,088		$	53,905			-7	%
Interest capitalized to inventory	$	11,961		$	12,031			-1	%	$	32,706		$	40,164			-19	%
Interest capitalized to investments in joint ventures	$	226		$	320			-29	%	$	604		$	1,105			-45	%
Interest expense	$	4,581		$	4,310			6	%	$	16,778		$	12,636			33	%
Interest in cost of sales (c)	$	12,457		$	12,864			-3	%	$	30,315		$	27,014			12	%
Other Data (d):
Home sales orders (units)		530			288			84	%		1,616			1,044			55	%
Homes closed (units)		328			351			-7	%		873			806			8	%
Average selling price	$	403		$	435			-7	%	$	413		$	416			-1	%
Average active selling communities		63			79			-20	%		66			78			-15	%
Home sales orders per community		8.4			3.6			133	%		24.5			13.4			83	%
Cancellation rate		13	%		27	%					14	%		21	%
Backlog at end of period (units)		1,204			682			77	%
Backlog at end of period (estimated sales value)	$	507,226		$	295,065			72	%
Lots owned or controlled (units)		18,244			18,289			0	%
Homes under construction (units) (e)		1,055			791			33	%

(a) Homebuilding revenue and gross margin include house, land and other homebuilding activities.

(b) Adjusted EBITDA is net income (loss) adjusted for certain items customary to the homebuilding industry, such as: (1) professional fees related to debt issuance costs, modifications and waivers, (2) loss on debt extinguishment, (3) deposit write-offs and impairment losses on real estate assets, investments in joint ventures and non-controlling interest, (4) realized (gains) losses on sales of investments and other than temporary impairments on investments, and (5) restructuring costs, primarily severance. Other companies may calculate Adjusted EBITDA differently. Adjusted EBITDA information, as presented, is useful as a measure of the ability to service debt and obtain financing; however, it is not a U.S. generally accepted accounting principle (“GAAP”) financial measure and should not be considered in isolation or as an alternative to operating performance or other liquidity measures prescribed by GAAP.

(c) As previously capitalized to house and land.

(d) Represents consolidated activity only; excludes unconsolidated joint ventures.

(e) Homes under construction includes completed homes.

* See “Reconciliation of Non-GAAP Financial Measures” beginning on page 9.

	September 30, 2012		December 31, 2011		% Change
	(unaudited)
Balance Sheet Data:
Cash and cash equivalents, restricted cash and investments	$	233,297	$	314,512		-26	%
Inventory		886,695		783,810		13	%
Investments in joint ventures		18,272		17,870		2	%
Total assets		1,330,391		1,328,116		0	%
Notes payable		758,682		752,056		1	%
Total equity		283,240		328,003		-14	%

Page 4

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	September 30 2012		December 31, 2011
	(unaudited)
Assets
Cash and cash equivalents	$	205,640	$	268,366
Restricted cash		13,733		13,718
Investments		13,924		32,428
Accounts and other receivables, net		128,211		120,689
Receivables from related parties, net		33,447		60,223
Inventory		886,695		783,810
Investments in joint ventures		18,272		17,870
Other assets, net		30,469		31,012
Total assets	$	1,330,391	$	1,328,116
Liabilities and equity
Liabilities:
Notes payable	$	758,682	$	752,056
Other liabilities		288,469		248,057
Total liabilities		1,047,151		1,000,113
Total equity		283,240		328,003
Total liabilities and equity	$	1,330,391	$	1,328,116

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenues	$	146,421		$	157,300		$	384,492		$	346,293
Cost of sales		(115,225	)		(133,645	)		(308,238	)		(301,947	)
Gross margin		31,196			23,655			76,254			44,346
Selling, general and administrative expenses		(26,297	)		(20,277	)		(65,672	)		(56,153	)
Loss on debt extinguishment		—			—			—			(88,384	)
Interest expense		(4,581	)		(4,310	)		(16,778	)		(12,636	)
Other income, net		8,789			443			3,081			2,365
Income (loss) before income taxes		9,107			(489	)		(3,115	)		(110,462	)
Income tax (expense) benefit		(807	)		2,851			(903	)		3,868
Net income (loss)		8,300			2,362			(4,018	)		(106,594	)
Less: Net loss (income) attributable to non-controlling interests		30			(264	)		(164	)		(702	)
Net income (loss) attributable to Shea Homes	$	8,330		$	2,098		$	(4,182	)	$	(107,296	)

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Operating activities
Net income (loss)	$	8,300		$	2,362		$	(4,018	)	$	(106,594	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Loss on debt extinguishment		—			—			—			88,384
Depreciation and amortization expense		1,934			2,724			5,255			7,213
Inventory impairment		—			—			—			10,302
Gain on sale of available-for-sale investments		(8,780	)		(130	)		(8,802	)		(539	)
Other operating activities, net		224			530			462			881
Changes in operating assets and liabilities:
Inventory		(86,318	)		12,071			(114,860	)		(36,153	)
Payables and other liabilities		34,318			12,817			42,924			28,804
Other operating assets		(2,857	)		(15,282	)		(7,770	)		(21,714	)
Net cash provided by (used in) operating activities		(53,179	)		15,092			(86,809	)		(29,416	)
Investing activities
Proceeds from sale of investments		18,742			285			23,954			1,180
Net proceeds from promissory notes from related parties		88			6,115			1,931			107,856
Other investing activities, net		(461	)		10,565			(1,495	)		1,768
Net cash provided by investing activities		18,369			16,965			24,390			110,804
Financing activities
Net decrease in debt		(488	)		(523	)		(1,541	)		(51,806	)
Amortization of notes payable discount		—			—			—			7,366
Other financing activities, net		1			1,386			1,234			5,214
Net cash provided by (used in) financing activities		(487	)		863			(307	)		(39,226	)
Net increase (decrease) in cash and cash equivalents		(35,297	)		32,920			(62,726	)		42,162
Cash and cash equivalents at beginning of period		240,937			176,116			268,366			166,874
Cash and cash equivalents at end of period	$	205,640		$	209,036		$	205,640		$	209,036

Page 6

SEGMENT OPERATING DATA

(dollars in thousands)

(unaudited)

	Three Months Ended September 30,								Nine Months Ended September 30,
	2012				2011				2012				2011
	Homes Closed		Avg. Selling Price		Homes Closed		Avg. Selling Price		Homes Closed		Avg. Selling Price		Homes Closed		Avg. Selling Price
Homes closed:
Southern California		57	$	546		89	$	620		168	$	503		191	$	528
San Diego		25		432		32		555		71		494		69		545
Northern California		55		527		52		491		170		500		139		486
Mountain West		58		438		57		391		160		446		130		418
South West		125		274		115		266		285		281		262		271
Other		8		215		6		212		19		216		15		235
Total consolidated		328	$	403		351	$	435		873	$	413		806	$	416
Unconsolidated joint ventures		35		322		31		313		92		310		80		309
Total		363	$	395		382	$	425		965	$	403		886	$	406
	Three Months Ended September 30,								Nine Months Ended September 30,
	2012				2011				2012				2011
	Home Sales Orders		Avg. Active Selling Communities		Home Sales Orders		Avg. Active Selling Communities		Home Sales Orders		Avg. Active Selling Communities		Home Sales Orders		Avg. Active Selling Communities
Home sales orders:
Southern California		89		7		52		14		247		8		219		13
San Diego		71		8		48		11		181		9		137		10
Northern California		140		16		55		16		376		16		159		14
Mountain West		106		13		50		13		316		13		188		13
South West		119		16		74		22		467		17		316		25
Other		5		3		9		3		29		3		25		3
Total consolidated		530		63		288		79		1,616		66		1,044		78
Unconsolidated joint ventures		45		10		24		14		151		11		87		14
Total		575		73		312		93		1,767		77		1,131		92

	At September 30,
	2012				2011
	Backlog Units		Backlog Sales Value		Backlog Units		Backlog Sales Value
Backlog:
Southern California		138	$	84,216		119	$	63,725
San Diego		149		61,243		110		54,382
Northern California		311		140,399		119		60,888
Mountain West		251		117,832		117		56,057
South West		334		98,239		201		56,792
Other		21		5,297		16		3,221
Total consolidated		1,204	$	507,226		682	$	295,065
Unconsolidated joint ventures		93		29,998		29		10,423
Total		1,297	$	537,224		711	$	305,488

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SEGMENT OPERATING DATA (continued)

(unaudited)

	At September 30,
	2012		2011
Lots owned or controlled:
Southern California		1,048		1,367
San Diego		887		877
Northern California		3,924		4,337
Mountain West		10,265		10,020
South West		2,083		1,620
Other		37		68
Total consolidated		18,244		18,289
Unconsolidated joint ventures		1,884		6,076
Total		20,128		24,365
Lots by ownership type:
Lots owned		10,254		10,141
Lots optioned or subject to contract		7,990		8,148
Joint venture lots		1,884		6,076
Total		20,128		24,365

Page 8

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(in thousands)

(unaudited)

In this earnings release, we utilize certain financial measures and ratios, including Adjusted EBITDA, that in each case are not recognized under GAAP. These measures are presented as we believe they and similar measures are useful to investors in evaluating a company’s operating performance and financing structure and, in certain cases, because they could be used to determine compliance with contractual covenants. We believe these measures also facilitate the comparison of our operating performance and financing structure with other companies in our industry. However, because these measures are not calculated in accordance with GAAP, they may not be comparable to other similarly titled measures of other companies and should not be considered a substitute for, or superior to, financial measures prepared in accordance with GAAP.

The following reconciles revenues, cost of sales and gross margins, as reported, to adjusted revenues, cost of sales and gross margins, which excludes impairment charges, interest in cost of sales, land sales and other transactions:

	Three Months Ended September 30, 2012												Three Months Ended September 30, 2011
	Revenue			Cost of Sales			Gross Margin $			Gross Margin %			Revenue			Cost of Sales			Gross Margin $			Gross Margin %
Total	$	146,421		$	(115,225	)	$	31,196			21.3	%	$	157,300		$	(133,645	)	$	23,655			15.0	%
Less: Other		(247	)					(247	)					(326	)					(326	)
Homebuilding		146,174			(115,225	)		30,949			21.2	%		156,974			(133,645	)		23,329			14.9	%
Less: Land		(13,071	)		6,425			(6,646	)		50.8	%		(2,956	)		2,678			(278	)		9.4	%
Less: Impairment		—			—			—						—			—			—
Less: Other homebuilding		(883	)		1,323			440						(1,360	)		4,666			3,306
House	$	132,220		$	(107,477	)	$	24,743			18.7	%	$	152,658		$	(126,301	)	$	26,357			17.3	%
Add: Interest in house cost of sales (a)					9,594			9,594									12,616			12,616
Adjusted house excluding interest in cost of sales	$	132,220		$	(97,883	)	$	34,337			26.0	%	$	152,658		$	(113,685	)	$	38,973			25.5	%
	Nine Months Ended September 30, 2012												Nine Months Ended September 30, 2011
	Revenue			Cost of Sales			Gross Margin $			Gross Margin %			Revenue			Cost of Sales			Gross Margin $			Gross Margin %
Total	$	384,492		$	(308,238	)	$	76,254			19.8	%	$	346,293		$	(301,947	)	$	44,346			12.8	%
Less: Other		(738	)					(738	)					(851	)					(851	)
Homebuilding		383,754			(308,238	)		75,516			19.7	%		345,442			(301,947	)		43,495			12.6	%
Less: Land		(21,773	)		12,931			(8,842	)		40.6	%		(6,986	)		5,828			(1,158	)		16.6	%
Less: Impairment		—			—			—						—			10,302			10,302
Less: Other homebuilding		(1,743	)		5,588			3,845						(3,481	)		9,497			6,016
House	$	360,238		$	(289,719	)	$	70,519			19.6	%	$	334,975		$	(276,320	)	$	58,655			17.5	%
Add: Interest in house cost of sales (a)					26,255			26,255									26,384			26,384
Adjusted house excluding interest in cost of sales	$	360,238		$	(263,464	)	$	96,774			26.9	%	$	334,975		$	(249,936	)	$	85,039			25.4	%

(a) Interest incurred is generally capitalized to inventory, then expensed in cost of sales as related units close.

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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (continued)

(in thousands)

(unaudited)

The following reconciles net income (loss) to Adjusted EBITDA:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net income (loss)	$	8,300		$	2,362		$	(4,018	)	$	(106,594	)
Adjustments:
Income tax expense (benefit)		807			(2,851	)		903			(3,868	)
Depreciation and amortization expense		1,934			2,724			5,255			7,213
Interest in cost of sales (a)		12,457			12,864			30,315			27,014
Interest in equity in income (loss) from joint ventures (b)		226			214			604			669
Interest expense (c)		4,581			4,310			16,778			12,636
Loss on debt extinguishment (d)		—			—			—			88,384
Impairment (e)		—			—			—			10,302
Project write-offs and abandonments (f)		342			128			773			210
Realized gain on sale of investments (g)		(8,780	)		(130	)		(8,802	)		(539	)
Deferred loss (gain) recognition from PIC Transaction (h)		(199	)		(713	)		7,168			(133	)
Other		4			99			21			(347	)
Adjusted EBITDA	$	19,672		$	19,007		$	48,997		$	34,947

(a) Interest incurred is generally capitalized to inventory, then expensed in cost of sales as related units close.

(b) Interest incurred is generally capitalized to investment in joint ventures, then expensed in equity in income (loss) from joint ventures as related units close.

(c) Interest is expensed to the extent assets qualifying for interest capitalization are less than debt.

(d) Loss on debt extinguishment in connection with payoff of previously outstanding indebtedness in May 2011.

(e) Impairment losses on real estate assets held and used in operations and investment in joint ventures.

(f) Includes non-refundable deposits and costs associated with preparatory due diligence for land acquisitions subsequently abandoned.

(g) Includes other than temporary gains on sale of investments.

(h) Amortization of deferred gain resulting from a series of novation and reinsurance transactions (“PIC Transaction”) entered into by Partners Insurance Company (“PIC”), a wholly-owned subsidiary.

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