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, 2013

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	92618-2215
(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, 2013 (unaudited) and December 31, 2012		1
		Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and 2012		2
		Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2013 and 2012		3
		Unaudited Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2013 and 2012		4
		Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012		5
		Notes to Condensed Consolidated Financial Statements at March 31, 2013 (Unaudited) and December 31, 2012 and for the Three Months Ended March 31, 2013 and 2012 (Unaudited)		6
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		46
	ITEM 4.	Controls and Procedures		47
PART 2.	Other Information
	ITEM 1.	Legal Proceedings		48
	ITEM 1A.	Risk Factors		48
	ITEM 6.	Exhibits		49
SIGNATURES				50

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Shea Homes Limited Partnership

(A California Limited Partnership)

Consolidated Balance Sheets

(In thousands)

	March 31, 2013		December 31, 2012
	(unaudited)
Assets
Cash and cash equivalents	$	251,478	$	279,756
Restricted cash		2,688		13,031
Accounts and other receivables, net		144,751		141,289
Receivables from related parties, net		34,253		34,028
Inventory		881,632		837,653
Investments in unconsolidated joint ventures		31,806		28,653
Other assets, net		36,895		39,127
Total assets	$	1,383,503	$	1,373,537
Liabilities and equity
Liabilities:
Notes payable	$	758,897	$	758,209
Payables to related parties		2,120		125
Accounts payable		42,537		62,738
Other liabilities		253,735		233,218
Total liabilities		1,057,289		1,054,290
Equity:
SHLP equity:
Owners’ equity		321,159		314,321
Accumulated other comprehensive income		4,647		4,517
Total SHLP equity		325,806		318,838
Non-controlling interests		408		409
Total equity		326,214		319,247
Total liabilities and equity	$	1,383,503	$	1,373,537

See accompanying notes

1

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Operations

(In thousands)

	Three Months Ended March 31,
	2013			2012
	(unaudited)			(unaudited)
Revenues	$	134,960		$	105,603
Cost of sales		(103,424	)		(85,035	)
Gross margin		31,536			20,568
Selling expenses		(10,154	)		(9,352	)
General and administrative expenses		(11,957	)		(8,251	)
Equity in income (loss) from unconsolidated joint ventures, net		(632	)		67
Gain (loss) on reinsurance transaction		648			796
Interest expense		(3,433	)		(6,288	)
Other income (expense), net		770			1,510
Income (loss) before income taxes		6,778			(950	)
Income tax benefit (expense)		59			752
Net income (loss)		6,837			(198	)
Less: Net loss (income) attributable to non-controlling interests		1			(213	)
Net income (loss) attributable to SHLP	$	6,838		$	(411	)

See accompanying notes

2

Shea Homes Limited Partnership

(A California Limited Partnership)

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

	Three Months Ended March 31,
	2013			2012
	(unaudited)			(unaudited)
Net income (loss)	$	6,837		$	(198	)
Other comprehensive income (loss), before tax
Unrealized investment holding gains (losses) during the year		250			2,243
Less: Reclassification adjustments for investment (gains) losses included in other income (expense)		(37	)		(23	)
Comprehensive income (loss), before tax		7,050			2,022
Income tax benefit (expense)		(83	)		(777	)
Comprehensive income (loss), net of tax		6,967			1,245
Less: Comprehensive (income) loss attributable to non-controlling interests		1			(213	)
Comprehensive income (loss) attributable to SHLP	$	6,968		$	1,032

See accompanying notes

3

Shea Homes Limited Partnership

(A California Limited Partnership)

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, 2011	$	1	$	173,555		$	120,955	$	0	$	294,511		$	6,392	$	300,903		$	27,100		$	328,003
Comprehensive income (loss):
Net income (loss)		0		(411	)		0		0		(411	)		0		(411	)		213			(198	)
Change in unrealized gains on investments, net		0		0			0		0		0			1,443		1,443			0			1,443
Total comprehensive income (loss)																1,032			213			1,245
Redemption of Company’s interest in consolidated joint venture (see Note 12)		0		(11,580	)		0		0		(11,580	)		0		(11,580	)		(28,239	)		(39,819	)
Contributions from non-controlling interests		0		0			0		0		0			0		0			1,746			1,746
Distributions to non-controlling interests		0		0			0		0		0			0		0			(344	)		(344	)
Balance, March 31, 2012 (unaudited)	$	1	$	161,564		$	120,955	$	0	$	282,520		$	7,835	$	290,355		$	476		$	290,831
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

See accompanying notes

4

Shea Homes Limited Partnership

(A California Limited Partnership)

Consolidated Statements of Cash Flows

(In thousands)

	Three Months Ended March 31,
	2013			2012
	(unaudited)			(unaudited)
Operating activities
Net income (loss)	$	6,837		$	(198	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in (income) loss from unconsolidated joint ventures		632			(67	)
(Gain) loss on reinsurance transaction		(648	)		(796	)
Net (gain) loss on sale of available-for-sale investments		(10	)		(23	)
Depreciation and amortization expense		1,759			1,812
Net interest capitalized on investment in joint ventures		(257	)		(177	)
Distributions of earnings from joint ventures		0			500
Changes in operating assets and liabilities:
Restricted cash		10,343			(168	)
Receivables and other assets		(4,755	)		8,680
Inventory		(44,743	)		(3,908	)
Payables and other liabilities		2,879			4,036
Net cash provided by (used in) operating activities		(27,963	)		9,691
Investing activities
Proceeds from sale of available-for-sale investments		3,069			203
Net collections (advances) on promissory notes from related parties		385			(108	)
Investments in unconsolidated joint ventures		(4,028	)		(450	)
Distributions from unconsolidated joint ventures		500			3
Net cash provided by (used in) investing activities		(74	)		(352	)
Financing activities
Principal payments to financial institutions and others		(241	)		(601	)
Contributions from non-controlling interests		0			1,746
Distributions to non-controlling interests		0			(344	)
Other financing activities		0			(168	)
Net cash provided by (used in) financing activities		(241	)		633
Net increase (decrease) in cash and cash equivalents		(28,278	)		9,972
Cash and cash equivalents at beginning of period		279,756			268,366
Cash and cash equivalents at end of period	$	251,478		$	278,338

See accompanying notes

5

Shea Homes Limited Partnership

(A California Limited Partnership)

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2013

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, 2012. Adjustments, consisting of normal, recurring accruals, loss reserves and deferred tax asset valuation allowance adjustments, 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 March 11, 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 and Florida.

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, 2013 are not necessarily indicative of results expected for the year ended December 31, 2013.

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. Actual results could differ significantly from those estimates.

Reclassifications

Certain reclassifications were made in the 2012 condensed consolidated financial statements to conform to classifications used in 2013. For the year ended December 31, 2012, investments of $12.1 million and property and equipment of $2.2 million were reclassified to other assets in the consolidated balance sheet, and, for the three months ended March 31, 2012, $0.2 million of investing cash flows were reclassified to operating cash flows in the consolidated statements of cash flows. Additionally, for the three

6

months ended March 31, 2012, an $0.8 million gain on reinsurance was reclassified from other income (expense), net to gain (loss) on reinsurance transaction in the consolidated statements of operations, with corresponding changes made to operating cash flows in the consolidated statements of cash flows.

2. Summary of Significant Accounting Policies

Inventory

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 in 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 may be offered that could have an impact on sales pace, 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 absorption rates has 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.

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

7

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, these 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 closes.

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. 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 the consolidated financial position or results of operations.

New Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”), which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, ASU 2013-02 requires an entity to present, either on the face of the income statement or in the notes to financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income in financial statements. For public entities, the amendments in ASU 2013-02 are effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted ASU 2013-02 effective January 1, 2013, which concerned disclosure requirements only and did not impact our consolidated financial statements.

8

3. Restricted Cash

At December 31, 2012, restricted cash included cash used as collateral for potential obligations paid by the Company’s bank, customer deposits temporarily restricted in accordance with regulatory requirements, and cash used in lieu of bonds. In January 2013, $10.0 million of restricted cash used as collateral for potential obligations paid by the Company’s bank was released to the Company. At March 31, 2013 and December 31, 2012, restricted cash was $2.7 million and $13.0 million, respectively.

4. Fair Value Disclosures

At March 31, 2013 and December 31, 2012, as required by ASC 825, the following presents net book values and estimated fair values of notes payable.

	March 31, 2013				December 31, 2012
	Net Book Value		Estimated Fair Value		Net Book Value		Estimated Fair Value
	(In thousands)
$750,000 senior secured notes	$	750,000	$	845,625	$	750,000	$	828,750
Secured promissory notes	$	8,897	$	8,897	$	8,209	$	8,209

The $750.0 million senior 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, 2013 and December 31, 2012, accounts and other receivables, net were as follows:

	March 31, 2013			December 31, 2012
	(In thousands)
Insurance receivables	$	131,250		$	131,519
Escrow receivables		3,282			576
Notes receivables		3,453			3,662
Development receivables		3,205			3,325
Other receivables		5,501			4,147
Reserve		(1,940	)		(1,940	)
Total accounts and other receivables, net	$	144,751		$	141,289

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, 2013 and December 31, 2012, insurance receivables from affiliate insurance carriers were $32.3 million and $30.2 million, respectively.

We reserve for uncollectible receivables that are specifically identified.

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6. Inventory

At March 31, 2013 and December 31, 2012, inventory was as follows:

	March 31, 2013		December 31, 2012
	(In thousands)
Model homes	$	68,518	$	69,210
Completed homes for sale		19,492		14,015
Homes under construction		239,702		189,929
Lots available for construction		240,319		249,463
Land under development		168,938		175,922
Land held for future development		64,198		60,466
Land held for sale, including water system connection rights		70,705		71,381
Land deposits and preacquisition costs		9,760		7,267
Total inventory	$	881,632	$	837,653

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 (see Note 2).

For the three months ended March 31, 2013 and 2012, there were no inventory impairment charges.

Interest Capitalization

Interest is capitalized on 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 as part of 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, 2013 and 2012, interest incurred, capitalized and expensed was as follows:

	Three Months Ended March 31,
	2013			2012
	(In thousands)
Interest incurred	$	16,768		$	16,661
Interest expensed (a)	$	3,433		$	6,288
Interest capitalized as a cost of inventory during the period	$	13,078		$	10,195
Interest previously capitalized as a cost of inventory, included in cost of sales	$	(9,511	)	$	(7,784	)
Interest capitalized in ending inventory (b)	$	106,416		$	113,847
Interest capitalized as a cost of investments in unconsolidated joint ventures during the period	$	257		$	177
Interest previously capitalized as a cost of investments in unconsolidated joint ventures, included in equity in income (loss) from unconsolidated joint ventures	$	(257	)	$	(177	)
Interest capitalized in ending investments in unconsolidated joint ventures	$	0		$	0

(a) For the three months ended March 31, 2013 and 2012, 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. Capitalized interest reflects the gross amount of capitalized interest as impairment charges recognized were generally not allocated to specific components of inventory.

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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. Earnings and losses are allocated in accordance with terms of joint venture agreements.

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, 2013 and December 31, 2012, Deficit Distributions were $0.7 million and $0.7 million, respectively.

For the three months ended March 31, 2013 and 2012, there were no impairments on investments in unconsolidated joint ventures.

At March 31, 2013 and December 31, 2012, total unconsolidated joint ventures’ notes payable was as follows:

	March 31, 2013		December 31, 2012
	(In thousands)
Bank and seller notes payable:
Guaranteed (subject to remargin obligations)	$	50,437	$	45,610
Non-guaranteed		9,532		22,894
Total bank and seller notes payable (a)		59,969		68,504
Partner notes payable:
Unsecured (b)		5,296		5,296
Total unconsolidated joint venture notes payable	$	65,265	$	73,800
Other unconsolidated joint venture notes payable (c)	$	36,481	$	57,839

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

(b) No guarantees were provided on partner notes payable.

(c) We have an indirect effective ownership in two joint ventures of 12.3% and .0003%, respectively, that had bank notes payable secured by real property, in which we have not provided any guaranty.

At March 31, 2013 and December 31, 2012, 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. At March 31, 2013 and December 31, 2012, we had an indemnification agreement from our joint venture partner for 90% of one secured loan balance, which was zero and zero, respectively. However, we cannot provide assurance we could collect under this indemnity agreement. In addition, our remargin obligation is limited to the lesser of 50% of the outstanding balance or $35.0 million for another joint venture loan, which outstanding loan balance was $50.4 million and $45.6 million at March 31, 2013 and December 31, 2012, respectively. Consequently, our maximum remargin obligation was $25.2 million and $22.8 million at March 31, 2013 and December 31, 2012, respectively. We also have an indemnification agreement from our joint venture partner under which we could potentially recover a portion of any remargin payments we make to the bank. However, we cannot provide assurance we could collect under this indemnity agreement. No liabilities were recorded for these guarantees at March 31, 2013 and December 31, 2012 as the fair value of the secured real estate assets exceeded the outstanding notes payable.

8. Variable Interest Entities

ASC 810 requires a VIE to be consolidated in 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 at March 31, 2013 and December 31, 2012 were evaluated to determine the primary beneficiary.

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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, 2013 and December 31, 2012, 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, 2013 and December 31, 2012, we had a variable interest in an unconsolidated joint venture determined to be a VIE. The joint venture, RRWS, LLC (“RRWS”), was formed in December 2012 and is owned 50% by the Company and 50% by a third-party real estate developer (the “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. The Company and Partner each executed limited completion, interest and carry guarantees and environmental indemnities on a joint and several basis. The Company also has a maximum aggregate liability under the re-margin arrangements of the lesser of 50% of the outstanding balance or $35.0 million. The obligations of the Company and Partner under the re-margin arrangements are limited during the first two years of the loans. In addition to re-margin arrangements, the Partner, and several of its principals, executed repayment guarantees with no limit on their liability. At March 31, 2013 and December 31, 2012, outstanding bank notes payable were $50.4 million and $45.6 million, respectively, of which the Company has a maximum remargin obligation of $25.2 million and $22.8 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 to the bank. However, the Company cannot provide assurance it could collect under this indemnity agreement.

In accordance with ASC 810, we determined we were not the primary beneficiary of RRWS because we did not have the power to direct activities that most significantly impact the economic performance of RRWS, such as determining or limiting the scope or purpose of the entity, selling or transferring property owned or controlled by the entity, and arranging financing for the 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, 2013 and December 31, 2012, 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.

At March 31, 2013, we had $0.6 million of refundable and non-refundable cash deposits associated with land option contracts with unconsolidated VIEs, having a $30.8 million remaining purchase price. We also had $6.3 million of refundable and non-refundable cash deposits associated with land option contracts that were not with VIEs, having a $209.1 million remaining purchase price.

Our loss exposure on land option contracts consists of non-refundable deposits, which were $6.6 million and $5.0 million at March 31, 2013 and December 31, 2012, respectively, and capitalized preacquisition costs of $2.9 million and $2.0 million, respectively, which were included in inventory in the consolidated balance sheets.

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9. Other Assets, Net

At March 31, 2013 and December 31, 2012, other assets were as follows:

	March 31, 2013		December 31, 2012
	(In thousands)
Income tax receivable	$	3,497	$	3,497
Investments		9,232		12,078
Property and equipment, net		2,421		2,237
Prepaid professional fees		3,316		3,451
Prepaid loan fees		6,426		6,688
Prepaid bank fees		289		403
Deposits in lieu of bonds and letters of credit		7,993		7,110
Prepaid insurance		2,139		2,148
Other		1,582		1,515
Total other assets, net	$	36,895	$	39,127

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, 2013 and 2012, realized gains on available-for-sale securities were zero.

Prepaid Professional and Loan Fees

In accordance with ASC 470, these amounts are debt issuance costs and are amortized as interest over the term of the related debt.

Deposits in Lieu of Bonds and Letters of Credit

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

In June 2010, due to maturity of an unsecured bank line of credit, certain letters of credit were presented for payment by the holders and the proceeds therefrom were recorded as deposits in lieu of letters of credit. These deposits may be returned as collateral requirements decrease or they are replaced with new letters of credit.

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10. Notes Payable

At March 31, 2013 and December 31, 2012, notes payable were as follows:

	March 31, 2013		December 31, 2012
	(In thousands)
$750.0 million 8.625% senior secured notes (“Secured Notes”), due May 2019	$	750,000	$	750,000
Promissory notes, interest ranging from 1% to 6%, maturing through 2014, secured by deeds of trust on inventory		8,897		8,209
Total notes payable	$	758,897	$	758,209

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. These 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, 2013 and December 31, 2012, 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 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, 2013 and December 31, 2012, we were in compliance with these covenants.

11. Other Liabilities

At March 31, 2013 and December 31, 2012, other liabilities were as follows:

	March 31, 2013		December 31, 2012
	(In thousands)
Completed operations	$	131,250	$	131,519
Warranty reserves		17,927		17,749
Deferred revenue/gain		30,141		30,902
Provisions for closed homes/communities		8,120		8,135
Deposits (primarily homebuyer)		18,889		15,684
Legal reserves		5,069		4,916
Accrued interest		24,258		8,086
Accrued compensation and benefits		5,935		4,697
Distributions payable		2,802		2,892
Deficit Distributions (see Note 7)		716		716
Other		8,628		7,922
Total other liabilities	$	253,735	$	233,218

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.

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For the three months ended March 31, 2013 and 2012, changes in completed operations reserves were as follows:

	Three Months Ended March 31,
	2013			2012
	(In thousands)
Balance, beginning of the period	$	131,519		$	109,390
Reserves provided (relieved)		1,972			1,391
Claims paid		(2,241	)		(6,801	)
Balance, end of the period	$	131,250		$	103,980

Reserves provided (relieved) for completed operations are generally fully offset by changes in insurance receivables (see Note 5), however, premiums paid for completed operations 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 insurance receivables under applicable policies when recovery is probable. At March 31, 2013 and December 31, 2012, insurance receivables were $131.3 million and $131.5 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 an expense 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, 2013 and 2012, changes in warranty liability were as follows:

	Three Months Ended March 31,
	2013			2012
	(In thousands)
Balance, beginning of the period	$	17,749		$	17,358
Provision for warranties		1,745			1,475
Warranty costs paid		(1,567	)		(2,173	)
Balance, end of the period	$	17,927		$	16,660

Deferred Revenue/Gain

Deferred revenue/gain represents deferred 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, 2013 and December 31, 2012, 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 originally

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deferred and will be recognized as income (expense) when related claims are paid or actuarial estimates are adjusted. At March 31, 2013 and December 31, 2012, the unamortized deferred gain was $20.1 million and $20.3 million, respectively. For the three months ended March 31, 2013 and 2012, we recognized $0.2 million and $0.6 million, respectively, of this deferral as income, which was included in other income (expense), net.

Second, PIC entered into reinsurance agreements with various unrelated reinsurers that reinsured 100% of the completed operations risks from August 1, 2001 to July 31, 2005. As a result of the reinsurance, a $15.6 million gain was originally deferred and will be recognized as income (expense) when the related claims are paid or actuarial estimates are adjusted. At March 31, 2013 and December 31, 2012, the unamortized deferred gain was $8.0 million and $8.4 million, respectively. For the three months ended March 31, 2013 and 2012, we recognized $0.4 million and $0.2 million, respectively, of this deferral as income (expense), which was included in other income (expense), net.

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 they 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 former non-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, 2013 and December 31, 2012, the remaining distribution payable was $2.8 million and $2.9 million, respectively.

12. Related Party Transactions

Related Party Receivables and Payables

At March 31, 2013 and December 31, 2012, receivables from related parties, net were as follows:

	March 31, 2013			December 31, 2012
	(In thousands)
Note receivable from JFSCI	$	24,403		$	24,498
Note receivable from unconsolidated joint venture		274			268
Notes receivable from related parties		19,665			19,940
Reserves for note receivables from related parties		(12,787	)		(12,766	)
Receivables from related parties		2,698			2,088
Total receivables from related parties, net	$	34,253		$	34,028

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 2013 and 2012, JFSCI elected to make prepayments, including accrued interest, of $0.3 million and $1.9 million, respectively, and applied these prepayments to future installments such that JFSCI would not be required to make a payment until August 2014. At March 31, 2013 and December 31, 2012, the note receivable from JFSCI, including accrued interest, was $24.4 million and $24.5 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 August 2014, we do not anticipate collection risks on the note receivable from JFSCI.

At March 31, 2013 and December 31, 2012, note receivable from unconsolidated joint venture, including accrued interest, was $0.3 million and $0.3 million, respectively. The note receivable bears interest at 8% and matures in 2020. Further, this note earns 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 this note, which includes consideration of prior payment history, operating performance and future payment requirements under the applicable note. Based on these criteria, we do not anticipate collection risks on this note.

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At March 31, 2013 and December 31, 2012, notes receivable from other related parties, including accrued interest, were $6.9 million and $7.2 million, respectively, net of related reserves of $12.8 million and $12.8 million, respectively. These notes are unsecured and mature from August 2016 through April 2021. At March 31, 2013 and December 31, 2012, these notes bore interest ranging from Prime less .75% (2.5%) to 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. At December 31, 2009, based on these criteria, two notes receivable were deemed uncollectible and fully reserved. We do not anticipate collection risks on the other notes.

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. The 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, 2013 and December 31, 2012, these receivables were $2.7 million and $2.1 million, respectively, and these payables were $2.1 million and $0.1 million, respectively.

Real Property and Joint Venture Transactions

In May 2012, for a nominal amount, SHLP purchased the non-controlling member’s entire 16.7% interest in Vistancia, LLC, a consolidated joint venture. However, the distribution payable remained (see Note 11).

In March 2012, SHLP’s entire 58% interest in Shea Colorado, LLC (“SCLLC”), a consolidated joint venture with Shea Properties II, LLC, a related party and the non-controlling member, was redeemed by SCLLC. In valuing its 58% interest in SCLLC, and to ensure receipt of net assets of equal value to its ownership interest, SHLP used third-party real estate appraisals. The estimated fair value of the assets received by SHLP was $30.8 million. However, as the non-controlling member is a related party under common control, the assets and liabilities received by SHLP were recorded at net book value and the difference in SHLP’s investment in SCLLC and the net book value of the assets and liabilities received was recorded as a reduction to SHLP’s equity.

As consideration for the redemption, SCLLC distributed assets and liabilities to SHLP having a net book value of $24.0 million, including $2.2 million cash, a $3.0 million secured note receivable, $20.0 million of inventory and $1.2 million of other liabilities. As a result of this redemption, SCLLC is no longer included in these consolidated financial statements effective March 31, 2012. This transaction resulted in a net reduction of $41.8 million in assets and $2.0 million in liabilities, and a $39.8 million reduction in total equity, of which $11.6 million was attributable to SHLP and $28.2 million was attributable to non-controlling interests.

At March 31, 2013 and 2012, we were the managing member for nine and seven, respectively, unconsolidated joint ventures and received a management fee from these joint ventures as reimbursement for direct and overhead costs incurred on behalf of the joint ventures and other associated costs. Fees from joint ventures representing reimbursement of our costs are recorded as a reduction to general and administrative expense. Fees from joint ventures representing amounts in excess of our costs are recorded as revenues. For the three months ended March 31, 2013, $1.6 million of management fees were offset against general and administrative expenses, and $0.1 million of management fees were included in revenues. For the three months ended March 31, 2012, $1.0 million of management fees were offset against 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, 2013 and 2012, general and administrative expenses included $5.2 million and $4.0 million, respectively, for corporate services provided by JFSCI.

We lease office space from related parties under non-cancelable operating leases. Leases are for five to ten year terms and generally provide for five year renewal options. For the three months ended March 31, 2013 and 2012, related party rental expense was $0.1 million and $0.2 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. These policies are purchased by affiliate entities and we pay premiums to these affiliates for the coverage provided by these third party 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, 2013 and 2012, amounts paid to affiliates for this retention insurance coverage were $3.9 million and $2.7 million, respectively.

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13. Income Taxes

For the three months ended March 31, 2013, income tax benefit (expense) was $0.1 million, primarily from the decrease in the deferred tax asset valuation allowance. At March 31, 2013, the net deferred tax asset was $32.5 million, which primarily related to available loss carryforwards, inventory and investment impairments, and housing inventory and land basis differences. The $32.5 million deferred tax asset valuation allowance fully reserves the net deferred tax asset due to inherent uncertainty of future income as the housing recovery is in its early stages. We will continue to monitor industry and economic conditions, and our ability to generate taxable income based on our business plan and available tax planning strategies, which would allow us to utilize the tax benefits of the net deferred tax assets and thereby allow us to reverse all, or a portion of, our valuation allowance.

In 2009, we filed a petition with the United States Tax Court (the “Tax Court”) regarding our position on the completed contract method of accounting for homebuilding activities by SHLP, SHI and subsidiaries. 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, all of which have been filed. We expect the tax Court to render its decision sometime during 2013. We expect our position will prevail, and have accordingly, not recorded a liability for related taxes or interest for SHI and its subsidiaries. Furthermore, as a limited partnership, any income taxes, interest or penalties which may be imposed on SHLP are the responsibility of the Partners and are not reflected in the tax provision in these consolidated financial statements. However, if the Tax Court rules in favor of the IRS, which is reasonably possible, SHI could be obligated to pay the IRS and applicable state taxing authorities up to $64 million and, under the Tax Distribution Agreement, SHLP could be obligated to make a distribution to the Partners up to $107 million to fund their related payments to the IRS and the applicable state taxing authorities. However, the amount we may pay on behalf of SHI and distribute to the partners of SHLP for this matter may not exceed $70.0 million. Any potential shortfall would be absorbed by the Partners of SHLP (see Note 15).

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 Prime less 2.05% (1.2% at March 31, 2013 and December 31, 2012) per annum on unreturned capital balances. At March 31, 2013 and December 31, 2012, accumulated undistributed preferred returns for Series B holders were $21.3 million and $20.8 million, respectively. Series D holders have a 1% ownership interest and earn a preferred return at 7% per annum on unreturned preferred capital balances. At March 31, 2013 and December 31, 2012, accumulated undistributed preferred returns for Series D holders were $56.1 million and $52.8 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.

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15. Contingencies and Commitments

At March 31, 2013 and December 31, 2012, certain unrecorded contingent liabilities and commitments were as follows:

	March 31, 2013		December 31, 2012
	(In thousands)
Tax Court CCM case (capped at $70.0 million)	$	70,000	$	70,000
Remargin obligations and guarantees for unconsolidated joint ventures (see Note 7)		25,219		22,805
Outstanding letters of credit		4,216		4,216
Costs to complete on surety bonds for Company projects		90,664		85,490
Costs to complete on surety bonds for joint venture projects		28,244		30,804
Costs to complete on surety bonds for related party projects		2,186		2,311
Water system connection rights purchase obligation		33,615		33,615
Total unrecorded contingent liabilities and commitments	$	254,144	$	249,241

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.

We record a reserve for potential legal claims and regulatory matters when they are probable of occurring and a potential loss is reasonably estimable, and are based on specific facts and circumstances, and we revise these estimates when necessary. At March 31, 2013 and December 31, 2012, we had reserves of $5.1 million and $4.9 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. At March 31, 2013, the range of reasonably possible losses in excess of amounts recorded was not material.

As described in Note 13, in 2009, we filed a petition with the Tax Court regarding our position on the completed contract method of accounting (“CCM”) for homebuilding activities. The Tax Court heard trial testimony in July 2012 and ordered the Company and the IRS to exchange briefs, all of which have been filed. We expect the Tax Court to render its decision sometime during 2013. We expect our position will prevail, and accordingly, no liability for related taxes or interest has been recorded. However, if the Tax Court rules in favor of the IRS, which is reasonably possible, SHI could be obligated to pay the IRS and applicable state taxing authorities up to $64 million and SHLP could be obligated to make a distribution to the Partners up to $107 million to fund their related payments to the IRS and the applicable state taxing authorities.

The indenture governing the Secured Notes restricts SHLP’s ability to make distributions to its partners pursuant to the Tax Distributions 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 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. 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.

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Letters of Credit, Surety Bonds and Project Obligations

On May 10, 2011, we entered into a $75.0 million letter of credit facility. At March 31, 2013 and December 31, 2012, outstanding letters of credit against the letter of credit facility was $4.2 million and $4.2 million, respectively.

We are required to provide surety bonds that guarantee completion of certain infrastructure serving our homebuilding projects. At March 31, 2013, there was $90.7 million of costs to complete in connection with $180.2 million of surety bonds issued. At December 31, 2012, there was $85.5 million of costs to complete in connection with $186.0 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, 2013, there was $28.2 million of costs to complete in connection with $68.0 million of surety bonds issued for unconsolidated joint venture projects, and a $2.2 million of costs to complete in connection with $5.8 million of surety bonds issued for related party projects. At December 31, 2012, there was $30.8 million of costs to complete in connection with $71.6 million of surety bonds issued for unconsolidated joint venture projects, and a $2.3 million of costs to complete in connection with $6.1 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 sale of new homes within 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 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 sale of new homes. At March 31, 2013 and December 31, 2012, in connection with a credit support arrangement, there was $6.0 million and $4.9 million, respectively, reimbursable to us from a metro-district in Colorado.

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, 2013 and December 31, 2012, in connection with certain funding arrangements, there was $13.1 million and $16.3 million, respectively, reimbursable to us from certain metro-districts, including $11.4 million and $11.9 million, respectively, from a metro-district in Colorado.

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.

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, 2013 and December 31, 2012, the Company exceeded the minimum tangible net worth requirement.

In one consolidated homebuilding project, we have contractual obligations to purchase and receive water system connection rights which, at March 31, 2013 and December 31, 2012, were $33.6 million. These water system connection rights are held and then transferred to homebuyers upon closing of their home or transferred upon sale of land to the respective buyer. These water system connection rights can also be sold or leased but generally only within the local jurisdiction.

20

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,
	2013		2012
	(In thousands)
Supplemental disclosure of cash flow information
Income taxes paid (refunded)	$	25	$	(2,445	)
Interest paid, net of amounts capitalized	$	109	$	14
Supplemental disclosure of noncash activities
Unrealized gain (loss) on available-for-sale investments, net	$	130	$	1,443
Reclassification of Deficit Distributions to (from) unconsolidated joint ventures from (to) other liabilities	$	0	$	(25	)
Purchase of land in exchange for note payable	$	929	$	319
Elimination of joint venture inventory, receivables from related parties and other assets	$	0	$	(41,600	)
Elimination of joint venture note payable and other liabilities	$	0	$	(1,949	)
Redemption of Company’s interest in consolidated joint venture and elimination of non-controlling interest, less cash retained by non-controlling interest	$	0	$	(39,651	)

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 adult 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 and Nevada; and

• Other, comprised of communities in Florida.

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.

21

Financial information relating to reportable segments was as follows:

	March 31, 2013		December 31, 2012
	(In thousands)
Total assets:
Southern California	$	207,907	$	213,481
San Diego		162,283		148,272
Northern California		281,419		256,728
Mountain West		304,799		297,276
South West		117,716		105,470
Other		6,831		6,943
Total homebuilding assets		1,080,955		1,028,170
Corporate		302,548		345,367
Total assets	$	1,383,503	$	1,373,537

	March 31, 2013		December 31, 2012
	(In thousands)
Inventory:
Southern California	$	157,274	$	161,700
San Diego		141,707		129,895
Northern California		246,861		226,307
Mountain West		236,101		227,130
South West		96,623		89,756
Other		3,066		2,865
Total inventory	$	881,632	$	837,653

	Three Months Ended March 31,
	2013		2012
	(In thousands)
Revenues:
Southern California	$	40,157	$	26,379
San Diego		9,629		14,107
Northern California		27,647		25,960
Mountain West		22,306		18,594
South West		33,533		19,515
Other		1,567		805
Total homebuilding revenues		134,839		105,360
Corporate		121		243
Total revenues	$	134,960	$	105,603

	Three Months Ended March 31,
	2013			2012
	(In thousands)
Income (loss) before income taxes:
Southern California	$	7,891		$	1,974
San Diego		(1,424	)		1
Northern California		1,893			817
Mountain West		(2,784	)		(3,367	)
South West		1,055			(1,657	)
Other		(74	)		(249	)
Total homebuilding income (loss) before income taxes		6,557			(2,481	)
Corporate		221			1,531
Total income (loss) before income taxes	$	6,778		$	(950	)

22

18. Supplemental Guarantor Information

The obligations under the Secured Notes are not guaranteed by any SHLP joint venture where SHLP and Shea Homes Funding Corp., a wholly owned subsidiary (collectively “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 sale of 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.

23

Condensed Consolidating Balance Sheet

March 31, 2013

	SHLP Corp (a)		Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Total
	(In thousands)
Assets
Cash and cash equivalents	$	211,392	$	15,389		$	24,697	$	0		$	251,478
Restricted cash		1,745		835			108		0			2,688
Accounts and other receivables, net		120,843		23,126			34,141		(33,359	)		144,751
Receivables from related parties, net		9,375		24,856			22		0			34,253
Inventory		602,080		278,440			1,916		(804	)		881,632
Investments in unconsolidated joint ventures		17,515		986			13,305		0			31,806
Investments in subsidiaries		681,926		65,365			93,316		(840,607	)		0
Other assets, net		17,931		18,936			28		0			36,895
Total assets	$	1,662,807	$	427,933		$	167,533	$	(874,770	)	$	1,383,503
Liabilities and equity
Liabilities:
Notes payable	$	758,897	$	0		$	0	$	0		$	758,897
Payables to related parties		20		0			4		2,096			2,120
Accounts payable		22,875		19,412			250		0			42,537
Other liabilities		184,099		36,883			66,917		(34,164	)		253,735
Intercompany		371,110		(396,669	)		27,654		(2,095	)		0
Total liabilities		1,337,001		(340,374	)		94,825		(34,163	)		1,057,289
Equity:
SHLP equity:
Owners’ equity		321,159		763,660			72,300		(835,960	)		321,159
Accumulated other comprehensive income		4,647		4,647			0		(4,647	)		4,647
Total SHLP equity		325,806		768,307			72,300		(840,607	)		325,806
Non-controlling interests		0		0			408		0			408
Total equity		325,806		768,307			72,708		(840,607	)		326,214
Total liabilities and equity	$	1,662,807	$	427,933		$	167,533	$	(874,770	)	$	1,383,503

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

24

Condensed Consolidating Balance Sheet

December 31, 2012

	SHLP Corp (b)		Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Total
	(In thousands)
Assets
Cash and cash equivalents	$	216,914	$	48,895		$	13,947	$	0		$	279,756
Restricted cash		11,999		875			157		0			13,031
Accounts and other receivables, net		117,560		23,537			35,250		(35,058	)		141,289
Receivables from related parties, net		8,271		25,668			89		0			34,028
Inventory		572,010		264,459			1,918		(734	)		837,653
Investments in unconsolidated joint ventures		13,948		984			13,721		0			28,653
Investments in subsidiaries		672,388		64,971			93,883		(831,242	)		0
Other assets, net		17,712		21,388			27		0			39,127
Total assets	$	1,630,802	$	450,777		$	158,992	$	(867,034	)	$	1,373,537
Liabilities and equity
Liabilities:
Notes payable	$	758,209	$	0		$	0	$	0		$	758,209
Payables to related parties		26		0			0		99			125
Accounts payable		34,384		27,879			475		0			62,738
Other liabilities		162,894		36,700			69,416		(35,792	)		233,218
Intercompany		356,451		(376,420	)		20,068		(99	)		0
Total liabilities		1,311,964		(311,841	)		89,959		(35,792	)		1,054,290
Equity:
SHLP equity:
Owners’ equity		314,321		758,101			68,624		(826,725	)		314,321
Accumulated other comprehensive income		4,517		4,517			0		(4,517	)		4,517
Total SHLP equity		318,838		762,618			68,624		(831,242	)		318,838
Non-controlling interests		0		0			409		0			409
Total equity		318,838		762,618			69,033		(831,242	)		319,247
Total liabilities and equity	$	1,630,802	$	450,777		$	158,992	$	(867,034	)	$	1,373,537

(b) Includes Shea Homes Funding Corp., whose financial position at December 31, 2012 was not material.

25

Condensed Consolidating Statement of Operations and Comprehensive income (Loss)

Three Months Ended March 31, 2013

	SHLP Corp (a)			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 (loss) 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 (loss) before income taxes		6,841			5,520			3,686			(9,269	)		6,778
Income tax benefit (expense)		(3	)		70			(8	)		0			59
Net income (loss)		6,838			5,590			3,678			(9,269	)		6,837
Less: Net loss (income) attributable to non-controlling interests		0			0			1			0			1
Net income (loss) attributable to SHLP	$	6,838		$	5,590		$	3,679		$	(9,269	)	$	6,838
Comprehensive income (loss)	$	6,968		$	5,720		$	3,678		$	(9,399	)	$	6,967

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

26

Condensed Consolidating Statement of Operations and Comprehensive Income (loss)

Three Months Ended March 31, 2012

	SHLP Corp (b)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
	(In thousands)
Revenues	$	67,786		$	36,327		$	1,490		$	0		$	105,603
Cost of sales		(54,206	)		(30,707	)		(186	)		64			(85,035	)
Gross margin		13,580			5,620			1,304			64			20,568
Selling expenses		(5,379	)		(2,992	)		(981	)		0			(9,352	)
General and administrative expenses		(5,604	)		(2,051	)		(596	)		0			(8,251	)
Equity in income (loss) from unconsolidated joint ventures, net		129			(24	)		(38	)		0			67
Equity in income (loss) from subsidiaries		3,751			(853	)		(1,277	)		(1,621	)		0
Gain (loss) on reinsurance transaction		0			0			796			0			796
Interest expense		(5,958	)		(326	)		(4	)		0			(6,288	)
Other income (expense), net		(926	)		1,845			655			(64	)		1,510
Income (loss) before income taxes		(407	)		1,219			(141	)		(1,621	)		(950	)
Income tax benefit (expense)		(4	)		752			4			0			752
Net income (loss)		(411	)		1,971			(137	)		(1,621	)		(198	)
Less: Net loss (income) attributable to non-controlling interests		0			0			(213	)		0			(213	)
Net income (loss) attributable to SHLP	$	(411	)	$	1,971		$	(350	)	$	(1,621	)	$	(411	)
Comprehensive income (loss)	$	1,032		$	3,414		$	(137	)	$	(3,064	)	$	1,245

(b) Includes Shea Homes Funding Corp.; no significant activity occurred in 2012.

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
Intercompany		14,658			(20,279	)		7,617		(1,996	)		0
Principal payments to financial institutions and others		(241	)		0			0		0			(241	)
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

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

28

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2012

	SHLP Corp (a)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
	(In thousands)
Operating activities
Net cash provided by (used in) operating activities	$	(13,867	)	$	236		$	22,583		$	739		$	9,691
Investing activities
Net collections (advances) on promissory notes from related parties		282			(247	)		(143	)		0			(108	)
Other investing activities		(109	)		154			(289	)		0			(244	)
Net cash provided by (used in) investing activities		173			(93	)		(432	)		0			(352	)
Financing activities
Principal payments to financial institutions and others		(402	)		0			(199	)		0			(601	)
Intercompany		24,223			803			(24,287	)		(739	)		0
Other financing activities		0			0			1,234			0			1,234
Net cash provided by (used in) financing activities		23,821			803			(23,252	)		(739	)		633
Net increase (decrease) in cash and cash equivalents		10,127			946			(1,101	)		0			9,972
Cash and cash equivalents at beginning of period		157,511			96,100			14,755			0			268,366
Cash and cash equivalents at end of period	$	167,638		$	97,046		$	13,654		$	0		$	278,338

(b) Includes Shea Homes Funding Corp.; no significant activity occurred in 2012.

29

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, 2012.

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 adult 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 and Nevada; and

• Other, comprised of communities in Florida.

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.

Overview

Improvement in housing market conditions continued in the first quarter of 2013. For the three months ended March 31, 2013, as compared to the three months ended March 31, 2012, net homes sales orders increased 4%, net homes sales orders per community increased 33%, homes closed increased 27% and homebuilding revenues increased 28%. Gross margin as a percentage of revenues improved from 19.5% to 23.4%. We have $263.4 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.

30

	Three Months Ended March 31,
	2013			2012			% Change
	(Dollars in thousands)
Revenues	$	134,960		$	105,603			28	%
Cost of sales		(103,424	)		(85,035	)		22
Gross margin		31,536			20,568			53
Selling expenses		(10,154	)		(9,352	)		9
General and administrative expenses		(11,957	)		(8,251	)		45
Equity in income (loss) from unconsolidated joint ventures		(632	)		67			—
Gain (loss) on reinsurance transaction		648			796			(19	)
Interest expense		(3,433	)		(6,288	)		(45	)
Other income (expense), net		770			1,510			(49	)
Income (loss) before income taxes		6,778			(950	)		—
Income tax benefit (expense)		59			752			(92	)
Net income (loss)		6,837			(198	)		—
Less: Net loss (income) attributable to non-controlling interests		1			(213	)		—
Net income (loss) attributable to SHLP	$	6,838		$	(411	)		—	%
Comprehensive income (loss)	$	6,967		$	1,245			460	%

For the three months ended March 31, 2013, net income (loss) attributable to SHLP was $6.8 million compared to $(0.4) million for the three months ended March 31, 2012. This increase in income was primarily attributable to an $11.0 million improvement in gross margins (driven by higher revenues and gross margin percentage) and a $2.9 million decrease in interest expense, partially offset by a $3.7 million increase in general and administrative expenses (driven by increased compensation expenses), an $0.8 million increase in selling expenses and a $0.7 million decrease in other income.

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, 2013 are not necessarily indicative of results expected for the year ended December 31, 2013.

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 generated from corporate, insurance brokerage services, and our captive insurance company, Partners Insurance Company (“PIC”), are in other revenues.

31

	Three Months Ended March 31,
	2013		2012		% Change
	(Dollars in thousands)
Revenues:
House revenues	$	131,486	$	100,905		30	%
Land revenues		2,929		3,963		(26	)
Other homebuilding revenues		424		492		(14	)
Total homebuilding revenues		134,839		105,360		28
Other revenues		121		243		(50	)
Total revenues	$	134,960	$	105,603		28	%

For the three months ended March 31, 2013, total revenues were $135.0 million compared to $105.6 million for the three months ended March 31, 2012. This increase was primarily attributable to a 27% increase in homes closed and a 3% increase in the average selling price (“ASP”) of homes closed.

For the three months ended March 31, 2013 and 2012, homebuilding revenues by segment were as follows:

	Three Months Ended March 31,
	2013		2012		% Change
	(Dollars in thousands)
Southern California:
House revenues	$	37,975	$	23,318		63	%
Land revenues		2,175		3,057		(29	)
Other homebuilding revenues		7		4		75
Total homebuilding revenues	$	40,157	$	26,379		52	%
San Diego:
House revenues	$	9,627	$	14,104		(32	)%
Land revenues		0		0		0
Other homebuilding revenues		2		3		(33	)
Total homebuilding revenues	$	9,629	$	14,107		(32	)%
Northern California:
House revenues	$	27,522	$	25,824		7	%
Land revenues		0		0		0
Other homebuilding revenues		125		136		(8	)
Total homebuilding revenues	$	27,647	$	25,960		6	%
Mountain West:
House revenues	$	21,369	$	17,552		22	%
Land revenues		754		906		(17	)
Other homebuilding revenues		183		136		35
Total homebuilding revenues	$	22,306	$	18,594		20	%
South West:
House revenues	$	33,426	$	19,302		73	%
Land revenues		0		0		0
Other homebuilding revenues		107		213		(50	)
Total homebuilding revenues	$	33,533	$	19,515		72	%

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Other:
House revenues	$	1,567	$	805	95	%
Land revenues		0		0	0
Other homebuilding revenues		0		0	0
Total homebuilding revenues	$	1,567	$	805	95	%

For the three months ended March 31, 2013, total homebuilding revenues were $134.8 million compared to $105.4 million for the three months ended March 31, 2012. This increase was primarily attributable to a 27% increase in homes closed and an 3% increase in the ASP of homes closed. The increase in the ASP of homes closed was primarily attributable to the general increase in new home prices, net of a shift to lower priced homes in certain markets.

For the three months ended March 31, 2013 and 2012, homes closed, and ASP of homes closed, by segment were as follows:

	Three Months Ended March 31,
	2013		2012		% Change
Homes closed:
Southern California		51		47		9	%
San Diego		23		27		(15	)
Northern California		61		57		7
Mountain West		53		38		39
South West		108		65		66
Other		6		4		50
Total consolidated		302		238		27
Unconsolidated joint ventures		27		20		35
Total homes closed		329		258		28	%
	Three Months Ended March 31,
	2013		2012		% Change
ASP of homes closed:
Southern California	$	744,608	$	496,128		50	%
San Diego		418,565		522,370		(20	)
Northern California		451,180		453,053		0
Mountain West		403,189		461,895		(13	)
South West		309,500		296,954		4
Other		261,167		201,250		30
Total consolidated		435,384		423,971		3
Unconsolidated joint ventures		339,630		309,800		10
Total ASP of homes closed	$	427,526	$	415,120		3	%

Home closings increased year over year in each segment, except San Diego, as a result of the positive order trends over the past few quarters. The decrease in the San Diego segment was due to a 36% reduction in active selling communities compared to 2012. The increase in the average selling price of homes closed was primarily due to general price increases in all of our Southern California and South West segments, partially offset by a shift to lower-priced homes delivered in our San Diego and Mountain West segments, which also experienced general increases in new home prices.

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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, 2013 and 2012 were as follows:

	Three Months Ended March 31,
	2013		Gross Margin %			2012		Gross Margin %
	(Dollars in thousands)
Gross margin	$	31,536		23.4	%	$	20,568		19.5	%

For the three months ended March 31, 2013, total gross margin was $31.5 million compared to $20.6 million for the three months ended March 31, 2012. This increase was primarily attributable to increased homes closed and higher margins resulting from general price increases experienced in all of our segments, net of higher labor and material costs.

Selling, General and Administrative Expense

Selling, general and administrative expenses for the three months ended March 31, 2013 and 2012 were as follows:

	Three Months Ended March 31,
	2013			2012			% Change
	(Dollars in thousands)
Total homebuilding revenues	$	134,839		$	105,360			28	%
Selling expense	$	10,154		$	9,352			9	%
% of total homebuilding revenues		7.5	%		8.9	%
General and administrative expense	$	11,957		$	8,251			45	%
% of total homebuilding revenues		8.9	%		7.8	%
Total selling, general and administrative expense	$	22,111		$	17,603			26	%
% of total homebuilding revenues		16.4	%		16.7	%

Selling Expense

For the three months ended March 31, 2013, selling expense was $10.2 million compared to $9.4 million for the three months ended March 31, 2012, but decreased as a percentage of revenues due to the increase in homebuilding revenues.

General and Administrative Expense

For the three months ended March 31, 2013, general and administrative expense was $11.9 million compared to $8.3 million for the three months ended March 31, 2012. The increase was primarily due to increased 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 real property development.

For the three months ended March 31, 2013, equity in income (loss) from unconsolidated joint ventures was ($0.6) million compared to $0.1 million for the three months ended March 31, 2012. For the three months ended March 31, 2013 and 2012, there were no significant earnings or losses from any unconsolidated joint venture.

Gain (Loss) on Reinsurance Transaction

Completed operations claims were previously insured through PIC for policy years August 1, 2001 to July 31, 2007. 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 (expense) when related claims are paid or actuarial estimates are adjusted.

34

For the three months ended March 31, 2013 and 2012, a $0.6 million and $0.8 million gain was recognized based on claims paid.

Interest Expense

Interest expense represents interest incurred and not capitalized. For the three months ended March 31, 2013 and 2012, 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, the qualifying amount is limited to the amount of debt. Interest incurred that is associated with non-qualifying amounts was expensed.

For the three months ended March 31, 2013, interest expense was $3.4 million compared to $6.3 million for the three months ended March 31, 2012. This decrease was primarily attributable to higher qualified assets.

Other Income (Expense), Net

Other income (expense), net is comprised of interest income, gains (losses) on sales of investments, pre-acquisition costs 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, 2013 and 2012, other income (expense), net was as follows:

	Three Months Ended March 31,
	2013		2012		% Change
	(Dollars in thousands)
Other income (expense), net:
Interest income	$	620	$	1,319		(53	)%
Gain on sale of investments		10		23		(57	)
Other income (expense)		140		168		(17	)
Total other income (expense), net	$	770	$	1,510		(49	)%

For the three months ended March 31, 2013, other income (expense), net was $0.8 million compared to $1.5 million for the three months ended March 31, 2012. This decrease was primarily attributable to decreased interest income in the Company’s bank and investment accounts.

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. SHI and its subsidiaries are C corporations, and therefore, federal and state income taxes for these entities are included in the consolidated financial statements.

At March 31, 2013 and December 31, 2012, net deferred tax assets of SHI before reserves were $32.5 million and $32.7 million, respectively, which primarily related to available loss carryforwards, inventory and investment impairments, and housing and land inventory basis differences. The $32.5 million deferred tax asset valuation allowance fully reserves the net deferred tax asset due to inherent uncertainty of future income as the housing recovery is in its early stages. We will continue to monitor industry and economic conditions, and our ability to generate taxable income based on our business plan and available tax planning strategies, which would allow us to utilize the tax benefits of the net deferred tax assets and thereby allow us to reverse all, or a portion of, our valuation allowance.

For the three months ended March 31, 2013, income tax benefit (expense) was $0.1 million compared to $0.8 million for the three months ended March 31, 2012. This change was primarily attributable to the adjustment to the valuation allowance for the reduction in deferred tax asset associated with the unrealized gains in investments held by SHI.

35

Net Loss (Income) Attributable to Non-Controlling Interests

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

For the three months ended March 31, 2013, net loss (income) attributable to non-controlling interests was $0 million compared to $0.2 million for the three months ended March 31, 2012. There were no significant activities for the three months ended March 31, 2013 and 2012, respectively.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income (loss) plus other comprehensive income (loss) attributable to unrealized gains (losses) from investments, net of reclassification adjustments for realized gains (losses) and tax benefit (expense).

For the three months ended March 31, 2013 and 2012, other comprehensive income (loss) was as follows:

	Three Months Ended March 31,
	2013		2012			% Change
	(Dollars in thousands)
Comprehensive income (loss):
Net income (loss)	$	6,837	$	(198	)		—	%
Unrealized gains (losses) on investments, net		130		1,443			(91	)
Total comprehensive income (loss), net	$	6,967	$	1,245			460	%

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. 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 with 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.

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For the three months ended March 31, 2013 and 2012, home sales orders, net of cancellations, were as follows:

	Three Months Ended March 31,
	2013		2012		% Change
Home sales orders, net:
Southern California		54		70		(23	)%
San Diego		91		53		72
Northern California		120		121		(1	)
Mountain West		112		89		26
South West		140		154		(9	)
Other		2		12		(83	)
Total consolidated		519		499		4
Unconsolidated joint ventures		46		43		7
Total home sales orders, net		565		542		4	%

For the three months ended March 31, 2013 and 2012, cancellation rates were as follows:

	Three Months Ended March 31,
	2013			2012
Cancellation rates:
Southern California		11	%		14	%
San Diego		19			31
Northern California		9			8
Mountain West		13			14
South West		15			13
Other		33			20
Total consolidated		14	%		15	%
Unconsolidated joint ventures		19			12
Total cancellation rates		14	%		14	%

For the three months ended March 31, 2013 and 2012, average active selling communities were as follows:

	Three Months Ended March 31,
	2013		2012		% Change
Average number of active selling communities:
Southern California		5		10		(50	)%
San Diego		7		11		(36	)
Northern California		12		15		(20	)
Mountain West		14		13		8
South West		16		19		(16	)
Other		2		3		(33	)
Total consolidated		56		71		(21	)
Unconsolidated joint ventures		11		12		(8	)
Total average number of active selling communities		67		83		(19	)%

37

For the three months ended March 31, 2013, consolidated home sales orders per active selling community were 9.3, or 3.1 per month, compared to 7.0, or 2.3 per month, for the three months ended March 31, 2012. The increase for the three months ended March 31, 2013 reflects the improved market conditions in each segment compared to the three months ended March 31, 2012. The improvement in housing demand for the three months ended March 31, 2013 is also reflected in our lower cancellation rates and higher traffic.

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 increase in the number of homes in backlog at March 31, 2013 compared to March 31, 2012, is due to the increased sales activity over the past several quarters as a result of the improving housing market conditions in all of our segments.

At March 31, 2013 and 2012, sales order backlog was as follows:

	Homes				Sales Value				ASP
	March 31,				March 31,				March 31,
	2013		2012		2013		2012		2013		2012
					(In thousands)				(In thousands)
Backlog:
Southern California		126		82	$	93,404	$	38,831	$	741	$	474
San Diego		175		65		80,748		27,037		461		416
Northern California		300		169		143,452		85,626		478		507
Mountain West		271		146		125,073		63,873		462		437
South West		244		241		78,580		64,259		322		267
Other		12		19		3,182		4,273		265		225
Total consolidated		1,128		722		524,439		283,899		465		393
Unconsolidated joint ventures		103		57		31,837		17,917		309		314
Total backlog		1,231		779	$	556,276	$	301,816	$	452	$	387

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.

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.

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At March 31, 2013, December 31, 2012 and March 31, 2012, total lots owned or controlled were as follows:

	March 31, 2013		December 31, 2012		% Change from December 31, 2012			March 31, 2012		% Change from March 31, 2012
Lots owned or controlled by segment:
Southern California		1,938		1,989		(3	)%		1,197		62	%
San Diego		746		764		(2	)		752		(1	)
Northern California		3,166		3,182		(1	)		3,968		(20	)
Mountain West		10,383		10,074		3			9,988		4
South West		2,442		1,876		30			1,846		32
Other		19		25		(24	)		52		(63	)
Total consolidated		18,694		17,910		4			17,803		5
Unconsolidated joint ventures		3,802		3,874		(2	)		1,956		94
Total lots owned or controlled		22,496		21,784		3	%		19,759		14	%
Lots owned or controlled by ownership type:
Lots owned for homebuilding		6,459		6,448		0	%		6,467		0	%
Lots owned and held for sale		3,293		3,382		(3	)		3,510		(6	)
Lots optioned or subject to contract for homebuilding		5,908		5,046		17			4,792		23
Lots optioned or subject to contract that will be held for sale		3,034		3,034		0			3,034		0
Unconsolidated joint venture lots		3,802		3,874		(2	)		1,956		94
Total lots owned or controlled		22,496		21,784		3	%		19,759		14	%

At March 31, 2013, December 31, 2012 and March 31, 2012, total homes under construction and completed homes were as follows:

	March 31, 2013		December 31, 2012		% Change from December 31, 2012			March 31, 2012		% Change from March 31, 2012
Homes under construction:
Sold		793		630		26	%		387		104	%
Unsold		71		133		(47	)		103		(31	)
Total consolidated		864		763		13			490		76
Unconsolidated joint ventures		65		64		2			39		67
Total homes under construction		929		827		12	%		529		76	%
Completed homes:(a)
Sold(b)		67		41		63	%		50		34	%
Unsold		27		22		23			51		(47	)
Total consolidated		94		63		49			101		(7	)
Unconsolidated joint ventures		21		9		133			19		(11	)
Total completed homes		115		72		60	%		120		(4	)%

^(a)  Excludes model homes

^(b)  Sold but not closed

39

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. At present, we do not have a revolving credit facility to fund short-term cash liquidity needs. At March 31, 2013, cash and cash equivalents were $251.5 million, restricted cash was $2.7 million and total debt was $758.9 million, compared to cash and cash equivalents of $279.8 million, restricted cash of $13.0 million and total debt of $758.2 million at December 31, 2012. Restricted cash includes customer deposits temporarily restricted in accordance with regulatory requirements and cash used in lieu of bonds.

Based on our financial condition, we believe existing cash, cash equivalents, cash from operations and the other sources available to us will likely be sufficient to provide for our cash requirements in the next twelve months. However, as we approach the end of this twelve month period, it is likely we will need additional sources of capital to fund our growth objectives, otherwise we would have to make adjustments to our land acquisition and development expenditures. Those sources, if available, could be from a secured or unsecured credit facility, new secured or unsecured notes or a combination of these. In evaluating this sufficiency for the next twelve months, 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, land purchase commitments, 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 that, depending on market conditions, will be available to acquire land and increase our active selling communities.

40

The 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. A weakening of our financial condition, including a material increase in our leverage or decrease in our 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 use of 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, all of which have been filed. We expect the Tax Court to render its decision sometime during 2013. Resolution of this matter, either through settlement or adjudication, may require payments (a) from SHI to the IRS and the applicable state taxing authorities for its income tax liability and interest and (b) from SHLP to its partners pursuant to the Tax Distribution Agreement for their liability attributable to SHLP’s income taxes and interest. We expect our position will prevail, but for adjudication contrary to our position, which is reasonably possible, the total amount of the SHI’s payment to the IRS and applicable state taxing authorities could be up to $64 million and the required distributions to SHLP’s partners pursuant to the Tax Distribution Agreement could be up to $107 million.

The indenture governing the Secured Notes 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 governing the Secured Notes.

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 has disallowed certain income recognition methodologies. If we are unsuccessful in appealing this decision, 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, 2012.

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, 2012.

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

	Three Months Ended March 31,
	2013			2012
	(In thousands)
Cash provided by (used in):
Operating activities	$	(27,963	)	$	9,691
Investing activities		(74	)		(352	)
Financing activities		(241	)		633
Net increase (decrease) in cash	$	(28,278	)	$	9,972

41

Cash from Operating Activities

For the three months ended March 31, 2013, cash provided by (used in) operating activities was $(28.0) million compared to $9.7 million for the three months ended March 31, 2012. This decrease was primarily attributable to increased land acquisitions, land development and construction costs of $57.4 million and reduced collections of accounts receivables of $13.4 million, partially offset by cash receipts from increased homes closed of $30.6 million and the release of $10.0 million restricted cash used as collateral for potential obligations paid by the Company’s bank.

Cash from Investing Activities

For the three months ended March 31, 2013, cash provided by (used in) investing activities was $(0.1) million compared to $(0.4) million for the three months ended March 31, 2012. This decrease was primarily attributable to increased investments in unconsolidated land development and homebuilding joint ventures formed in December 2012, partially offset by proceeds from the maturity and sale of available-for-sale investments.

Cash from Financing Activities

For the three months ended March 31, 2013, cash provided by (used in) financing activities was $(0.2) million compared to $0.6 million for the three months ended March 31, 2012. This decrease was primarily attributable to reduced contributions from non-controlling interests, net of distributions, partially offset by reduced principal payments to financial institutions and others.

Notes Payable

At March 31, 2013 and December 31, 2012, notes payable were as follows:

	March 31, 2013		December 31, 2012
Notes payable:
Senior secured notes	$	750,000	$	750,000
Other secured promissory notes		8,897		8,209
Total notes payable	$	758,897	$	758,209

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. These 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, 2013 and December 31, 2012, 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 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, 2013 and December 31, 2012, 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 governing the Secured Notes, 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 the 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, 2013, our Consolidated Fixed Charge Coverage Ratio, determined as specified in the Indenture, was 1.44.

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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, 2013, 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, 2012.

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 as a method of acquiring 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 sold. In such instances, an estimated purchase price for the unknown portion is not included in the total remaining purchase price. At March 31, 2013, we had owned or controlled 7,343 lots in Colorado for which the entire purchase price is determined at the time the underlying lots is sold to 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.

At March 31, 2013, we had $6.9 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 $239.9 million, compared to $5.3 million and $200.2 million, respectively, at December 31, 2012.

Water System Connection Rights

At one of our consolidated homebuilding projects, we have a contractual obligation to purchase and receive water system connection rights which, at March 31, 2013, were $33.6 million. These water system connection rights are held and then transferred to homebuyers upon closing of their home or transferred upon the sale of land to the respective buyer. These water system connection rights can also be sold or leased but generally only within the local jurisdiction.

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.

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At March 31, 2013 and December 31, 2012, total unconsolidated joint ventures’ notes payable were as follows:

	March 31, 2013		December 31, 2012
	(In thousands)
Bank and seller notes payable:
Guaranteed (subject to remargin obligations)	$	50,437	$	45,610
Non-Guaranteed		9,532		22,894
Total bank and seller notes payable (a)		59,969		68,504
Partner notes payable:
Unsecured (b)		5,296		5,296
Total unconsolidated joint venture notes payable	$	65,265	$	73,800
Other unconsolidated joint venture notes payable (c)	$	36,481	$	57,839

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

(b) No guarantees were provided on partner notes payable.

(c) We have an indirect effective ownership in two joint ventures of 12.3% and .0003%, respectively, that had bank notes payable secured by real property, in which we have not provided any guaranty.

At March 31, 2013 and December 31, 2012, remargin obligations and guarantees provided on the 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. At March 31, 2013 and December 31, 2012, we had an indemnification agreement from our joint venture partner for 90% of one secured loan balance, which was zero and zero, respectively. However, we cannot provide assurance we could collect under this indemnity agreement. In addition, our remargin obligation is limited to the lesser of 50% of the outstanding balance or $35.0 million for another joint venture loan, which outstanding loan balance was $50.4 million and $45.6 million at March 31, 2013 and December 31, 2012, respectively. Consequently, our maximum remargin obligation was $25.2 million and $22.8 million at March 31, 2013 and December 31, 2012, respectively. We also have an indemnification agreement from our joint venture partner under which we could potentially recover a portion of any remargin payments we make to the bank. However, we cannot provide assurance we could collect under this indemnity agreement. No liabilities were recorded for these guarantees at March 31, 2013 and December 31, 2012 as the fair value of the secured real estate assets exceeded the outstanding notes payable.

We may be required to use funds for obligations of these unconsolidated 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 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).

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Guarantees, Surety Obligations and Other Contingencies

At March 31, 2013 and December 31, 2012, certain unrecorded loan remargin or other guarantees, surety obligations and other contingencies were as follows:

	March 31, 2013		December 31, 2012
	(In thousands)
Tax Court CCM case (capped at $70.0 million)	$	70,000	$	70,000
Remargin obligations and guarantees for unconsolidated joint ventures		25,219		22,805
Outstanding letters of credit		4,216		4,216
Costs to complete on surety bonds for Company projects		90,664		85,490
Costs to complete on surety bonds for joint venture projects		28,244		30,804
Costs to complete on surety bonds for related party projects		2,186		2,311
Total unrecorded contingent liabilities and commitments	$	220,529	$	215,626

On May 10, 2011, we entered into a $75.0 million letter of credit facility. At March 31, 2013 and December 31, 2012, outstanding letters of credit against the letter of credit facility was $4.2 million and $4.2 million, respectively.

We are required to provide surety bonds that guarantee completion of certain infrastructure that serves our homebuilding projects. At March 31, 2013, there was $90.7 million of costs to complete in connection with $180.2 million of surety bonds issued. At December 31, 2012, there was $85.5 million of costs to complete in connection with $186.0 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, 2013, there was $28.2 million of costs to complete in connection with $68.0 million of surety bonds issued for unconsolidated joint venture projects, and a $2.2 million of costs to complete in connection with $5.8 million of surety bonds issued for related party projects. At December 31, 2012, there was $30.8 million of costs to complete in connection with $71.6 million of surety bonds issued for unconsolidated joint venture projects, and a $2.3 million of costs to complete in connection with $6.1 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 sale of new homes within 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 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 sale of new homes. At March 31, 2013 and December 31, 2012, in connection with a credit support arrangement, there was $6.0 million and $4.9 million, respectively, reimbursable to us from a metro-district in Colorado.

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, 2013 and December 31, 2012, in connection with certain funding arrangements, there was $13.1 million and $16.3 million, respectively, reimbursable to us from certain metro-districts, including $11.4 million and $11.9 million, respectively, from a metro-district in Colorado.

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, 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, 2013 and December 31, 2012, the Company exceeded the minimum tangible net worth requirement.

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RELATED PARTY TRANSACTIONS

In March 2012, SHLP’s entire 58% interest in Shea Colorado, LLC (“SCLLC”), a consolidated joint venture with Shea Properties II, LLC, a related party and the non-controlling member, was redeemed by SCLLC. In valuing its 58% interest in SCLLC, and to ensure receipt of net assets of equal value to its ownership interest, SHLP used third-party real estate appraisals. The estimated fair value of the assets received by SHLP was $30.8 million. However, as the non-controlling member is a related party under common control, the assets and liabilities received by SHLP were recorded at net book value and the difference in SHLP’s investment in SCLLC and the net book value of the assets and liabilities received was recorded as a reduction to SHLP’s equity.

As consideration for the redemption, SCLLC distributed assets and liabilities to SHLP having a net book value of $24.0 million, including $2.2 million cash, a $3.0 million secured note receivable, $20.0 million of inventory and $1.2 million of other liabilities. As a result of this redemption, SCLLC is no longer included in these consolidated financial statements effective March 31, 2012. This transaction resulted in a net reduction of $41.8 million in assets and $2.0 million in liabilities, and a $39.8 million reduction in total equity, of which $11.6 million was attributable to SHLP and $28.2 million was attributable to non-controlling interests.

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, 2013 and 2012, general and administrative expenses included $5.2 million and $4.0 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. These policies are purchased by affiliate entities and we pay premiums to these affiliates for the coverages provided by these third party 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, 2013 and 2012, amounts paid to affiliates for this retention insurance coverage were $3.9 million and $2.7 million, respectively.

CRITICAL ACCOUNTING POLICIES

We believe no significant changes occurred to our critical accounting policies during the three months ended March 31, 2013, as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations for December 31, 2012 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

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 and variable-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, 2013. 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, interest rate risk and changes in fair market value should not have a significant impact on such debt until we refinance.

We believe no significant changes to our market risks occurred during the three months ended March 31, 2013, 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, 2012.

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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, 2013. The term “disclosure controls and procedures,” as defined in Rules 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, 2013, 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 2013 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, certain forward-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, 2012 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;

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

• changes in demographic trends;

• changes in housing demands;

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• 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 these forward-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 and 15 to our consolidated financial statements, we do not believe we are subject to any material legal claims and regulatory matters at this time. However, if liabilities arising from their ultimate resolution of legal claims or regulatory matters exceeds their recorded reserves, we could incur additional charges that could be significant.

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, 2012.

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ITEM 6. EXHIBITS

3.1	Certificate of Limited Partnership of Shea Homes Limited Partnership (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 filed with the SEC on October 14, 2011 (File No. 333-177328))
3.2	Seventh Amended and Restated Agreement of Limited Partnership of Shea Homes Limited Partnership (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012)
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 quarters ended March 31, 2013, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (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 Regulation S-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 ar not subject to liability under those sections.

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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 10, 2013	By:	/s/ ROBERTO F. SELVA
		Roberto F. Selva
		Chief Executive Officer
		(Principal Executive Officer)
Dated: May 10, 2013	By:	/s/ ANDREW H. PARNES
		Andrew H. Parnes
		Chief Financial Officer
		(Principal Financial Officer)

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