UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

FORM 10-Q

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

For the quarterly period ended ~~September~~March 3031, ~~2016~~2017

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

For the transition period from _____ to _____

Commission file number 001-36001

UCP, Inc.

(Exact name of registrant as specified in its charter)



Delaware (State or other jurisdiction of incorporation)	90-0978085 (IRS Employer Identification No.)

99 Almaden Blvd., Suite 400, San Jose, CA 95113

(Address of principal executive offices, including Zip Code)

(408) 207-9499

(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 S No £

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 S 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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	£	Accelerated filer	S
Non-accelerated filer	£	Smaller reporting company	£
(Do not check if a smaller reporting company)		Emerging growth company	S

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Yes S No £

Indicate by check mark whether the registrant is a ~~large~~shell ~~accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting~~ company. ~~See~~(as ~~definitions~~defined ~~of “large accelerated filer,” “accelerated filer” and “smaller reporting company”~~ in Rule 12b-2 of the Exchange Act). Yes £ No S

~~Large~~On ~~accelerated~~May ~~filer~~3, £2017, ~~Accelerated~~the ~~filer~~registrant Shad ~~Non-accelerated~~7,958,314 ~~filer~~shares £of ~~Smaller~~Class ~~reporting~~A ~~company~~common £stock, ~~(Do~~par ~~not~~value ~~check~~$0.01 ifper ashare ~~smaller~~outstanding ~~reporting~~and ~~company)~~100 shares of Class B common stock, par value $0.01 per share outstanding.

~~Indicate~~UCP, ~~by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)~~INC.

Yes £ No S

On October 27, 2016, the registrant had 7,911,195 shares of Class A common stock, par value $0.01 per share outstanding and 100 shares of Class B common stock, par value $0.01 per share outstanding.

UCP, Inc.

FORM 10-Q

For the Three and Nine Months Ended September 30, 2016

TABLE OF CONTENTS

Page No.



		Page No.
	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016	3
	Condensed Consolidated Statements of Operations and Comprehensive Income or Loss for the Three Months Ended March 31, 2017 and 2016	4
	Condensed Consolidated Statements of Equity for the Three Months Ended March 31, 2017 and 2016	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	54
Item 4.	Controls and Procedures	54

	PART II - OTHER INFORMATION	54

Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	56

	Signatures	57

Part I - Financial Information
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	3
	Condensed Consolidated Statements of Operations and Comprehensive Income or Loss for the Three and Nine Months Ended September 30, 2016 and 2015	4
	Condensed Consolidated Statements of Equity for the Nine Months Ended September 30, 2016 and 2015	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	54
Item 4.	Controls and Procedures	54
Part II - Other Information		54
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	56
Signatures		57

UCP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except shares and per share data)

	September 30, 2016			December 31, 2015
	March 31, 2017			December 31, 2016
Assets
Cash and cash equivalents	$	2734,~~586~~270		$	3940,~~829~~931
Restricted cash	~~900~~1,547			~~900~~1,547
Real estate inventories	381,703			360,989
Total cash, cash equivalents and restricted cash	35,817			42,478
Fixed assets, net	966			1,314
Real estate inventories	389,379			373,207
Intangible assets, net	122			236
Fixed assets, net	855			883
Goodwill	—			4,223
Intangible assets, net	82			101
Receivables	43,~~512~~677			15,~~317~~628
Other assets	6,403			5,889
Deferred tax assets, net	5,227			5,482
Total assets	$	422,192		$	414,697
Other assets	7,081			6,327
Total assets	$	442,118		$	434,106
Liabilities and equity
Accounts payable	$	2116,~~714~~533		$	1418,~~882~~435
Accrued liabilities	2230,~~719~~998			2425,~~616~~342
Customer deposits	24,~~502~~526			12,~~825~~449
Notes payable, net	8387,~~663~~001			8286,~~486~~658
Senior notes, net	74,~~122~~550			7374,~~480~~336
Total liabilities	~~204~~213,~~720~~608			~~197~~207,~~289~~220
Commitments and contingencies (Note 11)
Equity
Preferred stock, par value $0.01 per share, 50,000,000 authorized, no shares issued and outstanding as of September 30, 2016; no shares issued and outstanding as of December 31, 2015	—			—
Preferred stock, par value $0.01 per share, 50,000,000 authorized, no shares issued and outstanding as of March 31, 2017; no shares issued and outstanding as of December 31, 2016	—			—
Class A common stock, $0.01 par value; 500,000,000 authorized, 8,034,831 issued and 7,911,195 outstanding as of September 30, 2016; 8,014,434 issued and outstanding as of December 31, 2015	80			80
Class A common stock, $0.01 par value; 500,000,000 authorized, 8,104,660 issued and 7,958,314 outstanding as of March 31, 2017; 8,042,834 issued and 7,896,488 outstanding as of December 31, 2016	81			80
Class B common stock, $0.01 par value; 1,000,000 authorized, 100 issued and outstanding as of September 30, 2016; 100 issued and outstanding as of December 31, 2015	—			—
Class B common stock, $0.01 par value; 1,000,000 authorized, 100 issued and outstanding as of March 31, 2017; 100 issued and outstanding as of December 31, 2016	—			—
Additional paid-in capital	9697,~~892~~532			9497,~~683~~123
Treasury stock at cost; 123,636 shares as of September 30, 2016; none as of December 31, 2015	(1,000		)	—
Treasury stock at cost; 146,346 shares as of March 31, 2017; 146,346 as of December 31, 2016	(1,250		)	(1,250		)
Accumulated deficit	(2,476		)	(4,563		)
Accumulated earnings	5,821			4,675
Total UCP, Inc. stockholders’ equity	93102,~~496~~184			90100,~~200~~628
Noncontrolling interest	~~123~~126,~~976~~326			~~127~~126,~~208~~258
Total equity	~~217~~228,~~472~~510			~~217~~226,~~408~~886
Total liabilities and equity	$	~~422~~442,~~192~~118		$	~~414~~434,~~697~~106

See accompanying notes to condensed consolidated financial statements.

UCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME OR LOSS

(Unaudited)

(In thousands, except shares and per share data)

	Three Months Ended September 30,						Nine months ended September 30,
	Three Months Ended March 31,
	2016			2015			2016			2015
	2017			2016
REVENUE:
Homebuilding	$	8994,~~840~~002		$	7068,~~284~~225		$	~~239,480~~		$	~~163,705~~
Land development	~~3,900~~496			~~1,116~~—			~~5,322~~			~~3,156~~
Other revenue	—			2,272			—			5,060
Total revenue:	94,498			68,225
Total revenue:	93,740			73,672			244,802			171,921
COSTS AND EXPENSES:
COSTS AND EXPENSES:
Cost of sales - homebuilding	76,653			56,206
Cost of sales - homebuilding	72,984			57,006			195,561			134,744
Cost of sales - land development	475			461
Cost of sales - land development	3,834			716			4,519			2,264
Impairment on real estate	102			—
Cost of sales - other revenue	—			1,958			—			4,363
Total cost of sales	77,230			56,667
Impairment on real estate	192			—			2,589			—
Gross margin - homebuilding	17,349			12,019
Total cost of sales	77,010			59,680			202,669			141,371
Gross margin - land development	21			(461		)
Gross margin - homebuilding	16,856			13,278			43,919			28,961
Gross margin - impairment on real estate	(102		)	—
Gross margin - land development	66			400			803			892
Total gross margin	17,268			11,558
Gross margin - other revenue	—			314			—			697
Sales and marketing	5,149			4,076
Gross margin - impairment on real estate	(192		)	—			(2,589		)	—
General and administrative	8,502			7,275
Total gross margin	16,730			13,992			42,133			30,550
Total expenses	13,651			11,351
Sales and marketing	4,853			4,692			13,595			13,246
Income from operations	3,617			207
General and administrative	4,592			5,539			19,101			19,311
Other income, net	460			28
Goodwill impairment	4,223			—			4,223			—
Net income before income taxes	$	4,077		$	235
Total costs and expenses	90,678			69,911			239,588			173,928
Provision for income taxes	(621		)	(5		)
Income (loss) from operations	3,062			3,761			5,214			(2,007		)
Net income	$	3,456		$	230
Other income, net	204			45			253			177
Net income attributable to noncontrolling interest	$	2,310		$	134
Net income (loss) before income taxes	$	3,266		$	3,806		$	5,467		$	(1,830	)
Net income attributable to UCP, Inc.	1,146			96
Provision for income taxes	(124		)	—			(271		)	—
Other comprehensive income, net of tax	—			—
Net income (loss)	$	3,142		$	3,806		$	5,196		$	(1,830	)
Comprehensive income	$	3,456		$	230
Net income (loss) attributable to noncontrolling interest	$	1,857		$	2,167		$	3,109		$	(961	)
Comprehensive income attributable to noncontrolling interest	$	2,310		$	134
Net income (loss) attributable to UCP, Inc.	1,285			1,639			2,087			(869		)
Comprehensive income attributable to UCP, Inc.	$	1,146		$	96
Other comprehensive income (loss), net of tax	—			—			—			—
Earnings per share of Class A common stock:
Comprehensive income (loss)	$	3,142		$	3,806		$	5,196		$	(1,830	)
Basic	$	0.14		$	0.01
Comprehensive income (loss) attributable to noncontrolling interest	$	1,857		$	2,167		$	3,109		$	(961	)
Diluted	$	0.14		$	0.01
Comprehensive income (loss) attributable to UCP, Inc.	$	1,285		$	1,639		$	2,087		$	(869	)
Weighted average shares of Class A common stock:
Earnings (loss) per share of Class A common stock:
Basic	7,950,723			8,021,747
Basic	$	0.16		$	0.21		$	0.26		$	(0.11	)
Diluted	8,102,962			8,022,601
Diluted	$	0.16		$	0.20		$	0.26		$	(0.11	)
Weighted average shares of Class A common stock:
Basic	7,948,268			7,995,934			7,993,371			7,950,700
Diluted	7,986,416			8,017,768			8,043,830			7,950,700

See accompanying notes to condensed consolidated financial statements.

UCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(In thousands, except number of shares)

	UCP, Inc. Shareholders’ Equity
	Shares of common stock outstanding		Common stock				Additionalpaid-incapital			Treasury stock			Accumulateddeficit			Noncontrollinginterest			Totalequity
	Class A	Class B	Class A		Class B
Balance as of December 31, 2014	7,922,216	100	$	79	$	—	$	94,110		$	—		$	(6,934	)	$	124,012		$	211,267
Class A - Issuance of common stock for RSUs, net of withholding taxes paid for vested RSUs	92,218		1				(160		)							(211		)	(370		)
Stock-based compensation expense							674									898			1,572
Distribution to noncontrolling interest																(981		)	(981		)
Net loss													(869		)	(961		)	(1,830		)
Balance as of September 30, 2015	8,014,434	100	$	80	$	—	$	94,624		$	—		$	(7,803	)	$	122,757		$	209,658
Balance as of December 31, 2015	8,014,434	100	$	80	$	—	$	94,683		$	—		$	(4,563	)	$	127,208		$	217,408
Class A - Issuance of common stock for RSUs, net of withholding taxes paid for vested RSUs	2011,~~397~~157						(20		)							(25		)	(45		)
Repurchase of common stock	(123,636)									(1,000		)							(1,000		)
Stock-based compensation expense							80									105			185
Re-allocation from stock issuances							1,909									(1,909		)	—
Net income													96			134			230
Stock-based compensation expense							320									423			743
Balance as of March 31, 2016	8,025,591	100	$	80	$	—	$	94,743		$	—		$	(4,467	)	$	127,422		$	217,778
Distribution to noncontrolling interest																(4,830		)	(4,830		)
Balance as of December 31, 2016	7,896,488	100	$	80	$	—	$	97,123		$	(1,250	)	$	4,675		$	126,258		$	226,886
Net income													2,087			3,109			5,196
Class A - Issuance of common stock for RSUs, net of withholding taxes paid for vested RSUs	61,826		1				(122		)							(158		)	(279		)
Balance as of September 30, 2016	7,911,195	100	$	80	$	—	$	96,892		$	(1,000	)	$	(2,476	)	$	123,976		$	217,472
Re-allocation from stock issuances							411									(411		)	—
Stock-based compensation expense							181									236			417
Excess income tax benefit from stock based awards							(61		)										(61		)
Distribution to noncontrolling interest																(1,909		)	(1,909		)
Net income													1,146			2,310			3,456
Balance as of March 31, 2017	7,958,314	100	$	81	$	—	$	97,532		$	(1,250	)	$	5,821		$	126,326		$	228,510

See accompanying notes to condensed consolidated financial statements.

UCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



	Three Months Ended March 31,
(In thousands)	2017			2016
Operating activities
Net income	$	3,456		$	230
Adjustments to reconcile net income to net cash used in operating activities:
Stock-based compensation	417			185
Excess income tax benefit from stock based awards	(61		)	—
Abandonment charges	102			419
Impairment on real estate inventories	102			—
Depreciation and amortization	143			156
Fair value adjustment of contingent consideration	—			8
Deferred income taxes, net	255			—
Changes in operating assets and liabilities:
Real estate inventories	(15,348		)	(10,839		)
Receivables	1,951			(71		)
Other assets	(740		)	1,104
Accounts payable	(1,902		)	(2,697		)
Accrued liabilities	5,229			(1,230		)
Customer deposits	2,077			454
Income taxes payable	427			(64		)
Net cash used in operating activities	(3,892		)	(12,345		)
Investing activities
Purchases of fixed assets	(106		)	(22		)
Net cash used in investing activities	(106		)	(22		)
Financing activities
Distribution to noncontrolling interest	(1,909		)	—
Proceeds from notes payable	39,771			35,476
Repayment of notes payable	(39,375		)	(33,112		)
Debt issuance costs	(871		)	(12		)
Withholding taxes paid for vested RSUs	(279		)	(45		)
Net cash (used in) provided by financing activities	(2,663		)	2,307
Net decrease in cash, cash equivalents and restricted cash	(6,661		)	(10,060		)
Cash, cash equivalents and restricted cash – beginning of period	42,478			40,729
Cash, cash equivalents and restricted cash – end of period	$	35,817		$	30,669

Non-cash investing and financing activity
Exercise of land purchase options acquired with acquisition of business	$	10		$	6
Issuance of Class A common stock for vested restricted stock units	$	1,007		$	113

Supplemental cash flow information
Income taxes paid	$	—		$	70

	Nine months ended September 30,
	2016			2015
Operating activities
Net income (loss)	$	5,196		$	(1,830	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Stock-based compensation	743			1,572
Abandonment charges	505			146
Impairment on real estate inventories	2,589			—
Depreciation and amortization	492			463
Goodwill impairment	4,223			—
Fair value adjustment of contingent consideration	(2,400		)	(818		)
Changes in operating assets and liabilities:
Real estate inventories	(23,067		)	(60,715		)
Receivables	(3,195		)	307
Other assets	(411		)	(2,389		)
Accounts payable	6,832			14,732
Accrued liabilities	302			(4,360		)
Customer deposits	677			1,125
Income taxes payable	202			—
Net cash used in operating activities	(7,312		)	(51,767		)
Investing activities
Purchases of fixed assets	(117		)	(311		)
Net cash used in investing activities	(117		)	(311		)
Financing activities
Distribution to noncontrolling interest	(4,830		)	(981		)
Proceeds from notes payable	106,663			112,595
Repayment of notes payable	(105,488		)	(77,895		)
Debt issuance costs	(114		)	(698		)
Repurchase of common stock	(1,000		)	—
Withholding taxes paid for vested RSUs	(45		)	(370		)
Net cash (used by) provided by financing activities	(4,814		)	32,651
Net decrease in cash and cash equivalents	(12,243		)	(19,427		)
Cash and cash equivalents – beginning of period	39,829			42,033
Cash and cash equivalents – end of period	$	27,586		$	22,606
Non-cash investing and financing activity
Exercise of land purchase options acquired with acquisition of business	$	74		$	160
Issuance of Class A common stock for vested restricted stock units	$	189		$	680
Supplemental cash flow information
Income taxes paid	$	69		$	—

See accompanying notes to condensed consolidated financial statements.

UCP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

As used in this report, unless the context otherwise requires or indicates, references to “the Company,” “we,” “our” and “UCP” refer to UCP, Inc. and its consolidated subsidiaries, including UCP, LLC.

Business Description and Organizational Structure of the Company:

The Company is a homebuilder and land developer with expertise in residential land acquisition, development and entitlement, as well as home design, construction and sales. The Company’s homebuilding and land development operations are each segmented into two geographic regions, West and Southeast. We operate in the states of California, Washington, North Carolina, South Carolina and Tennessee.

The Company’s operations began in 2004 and principally focused on acquiring land, ~~and~~ entitling and developing it for residential construction, and selling residential lots to third-party homebuilders. In 2010, the Company formed Benchmark Communities, LLC, its wholly-owned homebuilding subsidiary, to design, construct and sell high quality single-family homes. InOn ~~2014~~April 10, 2017, the Company ~~completed~~entered into an Agreement and Plan of Merger (the ~~acquisition~~“Merger Agreement”) pursuant to which the Company has agreed to merge with a wholly-owned subsidiary of Century Communities, Inc. (together with its subsidiaries and unless the ~~assets~~context otherwise requires, “Century”). In the merger, each outstanding share of the Company’s Class A common stock, par value $0.01 per share (“Class A common stock”), will be converted into the right to receive $5.32 in cash and ~~liabilities~~0.2309 of ~~Citizens~~a ~~Homes~~newly issued share of Century common stock, ~~Inc~~par value $0.01 per share (“~~Citizens~~Century ~~Acquisition~~Common Stock”). The transaction is expected to ~~expand~~close ~~its~~by ~~operations~~the ~~for~~end of the ~~purchase~~third quarter of ~~real~~2017, ~~estate~~subject ~~and~~to ~~the~~customary ~~construction~~closing ~~and~~conditions, ~~marketing~~including the adoption of ~~residential~~the ~~homes~~Merger inAgreement by the ~~Southeast~~Company’s stockholders at a special meeting. See Note 13, “Subsequent Event” to the accompanying unaudited condensed consolidated financial statements for a further discussion of the merger.

The Company is a holding company, whose principal asset is its interest in UCP, LLC, the subsidiary through which it directly and indirectly conducts its business. As of ~~September~~March 3031, ~~2016~~2017, the Company held a 43.13% economic interest in UCP, LLC and PICO Holdings, Inc. (“PICO”), a NASDAQ-listed, diversified holding company, held the remaining 56.97% economic interest in UCP, LLC.

Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. These financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, ~~2015~~2016, which are included in the Company’s Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on March 143, ~~2016~~2017. The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the Company’s results for the interim periods presented. These consolidated and segment results are not necessarily indicative of the Company’s future performance.

As an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, the Company has taken advantage of certain temporary exemptions from various reporting requirements, including, ~~but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and~~ reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements. The Company could be an emerging growth company until the last day of the fiscal year following the fifth anniversary of the July 23, 2013 completion of its initial public offering, although a variety of circumstances can cause it to lose this status earlier.

Use of Estimates in Preparation of Financial Statements:

The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the ~~reported amounts of assets and liabilities and~~ disclosure ~~of contingent liabilities at the date of the financial statements~~ and ~~the~~ reported amounts of revenues and expenses for each reporting period. The significant estimates made in the preparation of the Company’s accompanying unaudited condensed consolidated financial statements relate to the assessment of real estate impairments, valuation of assets and liabilities ~~acquired,~~reported ~~warranty~~at ~~reserves, income taxes and contingent liabilities. While management believes that~~ the ~~carrying~~date ~~value~~ of ~~such assets and liabilities are appropriate as of September 30, 2016 and December 31, 2015, it is reasonably possible that actual results could differ from~~ the ~~estimates~~financial ~~upon which the carrying values were based.~~

~~Related~~statements ~~Party~~and ~~Transactions:~~the reported amounts of revenues and expenses for each reporting period. The significant estimates made in the preparation of the Company’s accompanying unaudited condensed consolidated financial statements relate to the assessment of real estate impairments, valuation of assets and liabilities acquired, cost capitalization, accrued obligations, warranty reserves, income taxes and contingent liabilities. While management believes that the carrying value of such assets and liabilities are appropriate as of March 31, 2017 and December 31, 2016, it is reasonably possible that actual results could differ from the estimates upon which the carrying values were based.

AsRelated ofParty September 30, 2016, PICO holds an economic and voting interest in our Company equal to approximately 56.9%. The Company is party to certain agreements with PICO, including an Exchange Agreement (pursuant to which PICO has the right to cause the Company to exchange PICO’s interests in UCP, LLC for shares of the Company’s Class A common stock on a one-for-one basis, subject to equitable adjustments for stock splits, stock dividends, reclassifications and repurchases by UCP of Class A common stock), an Investor Rights Agreement (pursuant to which PICO has certain rights, including the right to select two individuals for nomination for election to the Company’s board of directors for as long as PICO owns at least a 25% voting interest in the Company), a Tax Receivable Agreement (pursuant to which PICO is entitled to 85% of any cash savings in U.S. federal, state and local income tax that the Company actually realizes as a result of any increase in tax basis caused by PICO’s exchange of UCP, LLC interests for shares of the Company’s Class A common stock) and a Registration Rights Agreement, with respect to the shares of Class A common stock that PICO may receive in exchanges made pursuant to the Exchange Agreement. Transactions

~~Segment~~Agreements ~~Reporting:~~Related to our Initial Public Offering

As of March 31, 2017, PICO holds an economic and voting interest in our Company equal to approximately 56.7%. The Company is party to certain agreements with PICO, including an Exchange Agreement (pursuant to which PICO has ~~two~~the ~~operating~~right ~~segments~~to cause the Company to exchange PICO’s interests in UCP, ~~West~~LLC ~~and~~for ~~Southeast~~shares of the Company’s Class A common stock on a one-for-one basis, subject to equitable adjustments for stock splits, stock dividends, reclassifications and repurchases by UCP of Class A common stock), an Investor Rights Agreement (pursuant to which PICO has certain rights, including the right to select two ~~reportable~~individuals ~~segments~~for nomination for election to the Company’s board of directors (the “Board”) for as long as PICO owns at least a 25% voting interest in the Company), ~~Homebuilding~~a ~~and~~Tax ~~Land~~Receivable ~~development~~Agreement (pursuant to which PICO is entitled to 85% of any cash savings in U. ~~Each~~S. ~~reportable~~federal, ~~segment~~state ~~includes~~and ~~real~~local ~~estate~~income tax that the Company actually realizes as a result of any increase in tax basis caused by PICO’s exchange of UCP, LLC interests for shares of the Company’s Class A common stock) and a Registration Rights Agreement, with ~~similar~~respect ~~economic~~to ~~characteristics~~the shares of Class A common stock that PICO may receive in exchanges made pursuant to the Exchange Agreement. In connection with the pending merger transaction with Century, ~~including~~each ~~similar~~of ~~historical~~the Company, UCP, LLC and ~~expected~~PICO ~~long-term~~has ~~gross~~agreed ~~margin~~to ~~percentages~~terminate the Exchange Agreement, ~~product~~the ~~types~~Tax Receivable Agreement and the Registration Rights Agreement (without any payments from, ~~geography~~or any cost or expense to, ~~production~~any ~~processes~~such party) subject to and ~~methods~~contingent upon the completion of ~~distribution~~the proposed merger with Century.

~~Cash~~Voting ~~and~~Agreement ~~Cash Equivalents and Restricted Cash:~~

~~Cash~~Concurrently with the execution and ~~cash~~delivery ~~equivalents~~of ~~include~~the ~~highly~~Merger ~~liquid~~Agreement, ~~instruments~~on ~~purchased~~April 10, ~~with~~2017, ~~original~~Century, ~~maturities~~a wholly-owned subsidiary of ~~three~~Century, ~~months~~PICO, the Company and UCP, LLC entered into a voting support and transfer restriction agreement (the “Voting Agreement”). Pursuant to the terms of the Voting Agreement, PICO agreed, among other things, to vote all outstanding shares of Class A common stock and Class B common stock, par value $0.01 per share, of the Company currently held or ~~less~~thereafter acquired by PICO (the “PICO Shares”) in favor of the adoption of the Merger Agreement and against any proposal by third parties to acquire the Company, and to take certain other actions in furtherance of the transactions contemplated by the Merger Agreement, including the Exchange (as defined below), in each case subject to the limitations set forth in the Voting Agreement. Among other such limitations, PICO’s obligation to vote in favor of the adoption of the Merger Agreement will be reduced to such number of PICO Shares as is equal to 28% of the aggregate outstanding voting power of the Company if the Board changes its recommendation in respect of an Intervening Event (as defined in the Merger Agreement), and the Voting Agreement automatically terminates if the Merger Agreement is terminated (including if the Company terminates the Merger Agreement to accept a Superior Company Proposal, as defined in the Merger Agreement).

~~Cash~~The ~~items~~foregoing ~~that~~description ~~are~~of ~~restricted~~the asVoting Agreement is only a summary, does not purport to ~~withdrawal~~be orcomplete ~~usage~~and ~~include~~is ~~deposits~~qualified ofin ~~$0.9~~its ~~million~~entirety asby reference to the full text of ~~September 30~~the Voting Agreement, ~~2016~~which ~~and~~is ~~December 31,~~filed ~~2015,~~as ~~related~~an exhibit to aour ~~construction~~Current ~~loan,~~Report ~~credit~~on ~~card~~Form ~~agreements~~8-K ~~and~~filed awith ~~contractor’s~~the ~~license~~SEC on April 11, 2017.

~~Capitalization~~Agreement ofto ~~Interest:~~Exchange

Concurrently with the execution and delivery of the Merger Agreement, on April 10, 2017, the Company, UCP, LLC and PICO entered into an agreement to exchange (the “Agreement to Exchange”), pursuant to which PICO exercised its right under the Exchange Agreement to effect the exchange of all of its Series A Units of UCP, LLC for shares of Class A common stock (the “Exchange”). Under the Agreement to Exchange, the Exchange will occur immediately prior to, and remain subject to the consummation immediately thereafter of, the merger.

The foregoing description of the Agreement to Exchange is only a summary, does not purport to be complete and is qualified in its entirety by reference to the full text of the Agreement to Exchange, which is filed as an exhibit to our Current Report on Form 8-K filed with the SEC on April 11, 2017.

2017 Agreement with PICO. On February 6, 2017, PICO submitted a written notice of its nomination of Eric H. Speron (a current Class I director) and Keith M. Locker for election to our Board at the 2017 Annual Meeting of Stockholders and various governance related proposals to be voted upon at such meeting (the “PICO Notice”). On March 29, 2017, we entered into an agreement with PICO (the “2017 Agreement with PICO”) with respect to, among other things, the matters set forth in the

PICO Notice. Pursuant to this agreement, we have agreed to, among other things, (i) expand our Board from six to seven directors immediately prior to the 2017 Annual Meeting of Stockholders and nominate Messrs. Locker and Speron and Kathleen R. Wade (a Current Class I director) to be elected at the 2017 Annual Meeting of Stockholders to serve as directors with a term expiring at our 2020 Annual Meeting of Stockholders; and (ii) submit, recommend and solicit proxies in favor of governance proposals at the 2017 Annual Meeting of Stockholders. The governance proposals address the declassification of our Board, the calling of special meetings of stockholders, stockholder action by written consent, removal of directors and amendments to our bylaws. PICO has agreed to, among other things, vote all common stock held by it in favor of each of the Board’s director nominees at the 2017 Annual Meeting of Stockholders and in favor of each governance proposal and to withdraw the PICO Notice. The foregoing description of the 2017 Agreement with PICO is only a summary, does not purport to be complete and is qualified in its entirety by reference to the full text of the 2017 Agreement with PICO, which is filed as an exhibit to our Current Report on Form 8-K filed with the SEC on March 30, 2017. The Board has determined to await the result of the special meeting of stockholders at which stockholders will be asked to adopt the Merger Agreement. If the Merger Agreement is adopted and the transaction with Century is thereafter consummated, there will be no need to hold an annual meeting of stockholders during 2017. Alternatively, if the Merger Agreement is not approved and the transaction with Century is not consummated, the Board intends to convene an annual meeting of stockholders during 2017 at which the above-described governance matters, among other items, will be presented to stockholders for consideration.

Segment Reporting

The Company has segmented its operating activities into two operating segments, West and Southeast, and two reportable segments, Homebuilding and Land development. Each reportable segment includes real estate with similar economic characteristics, including similar historical and expected long-term gross margin percentages, product types, geography, production processes and methods of distribution.

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents include highly liquid instruments purchased with original maturities of three months or less. The Company has approximately $15.1 million of cash held in money market accounts on its condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016.

Cash items that are restricted as to withdrawal or usage include deposits of $1.5 million as of March 31, 2017 and December 31, 2016, related to a construction loan, credit card agreements, contractor’s license and a letter of credit.

As part of the Company’s adoption of Accounting Standards Update 2016-18 (“ASU 2016-18”), Statement of Cash Flows - Restricted Cash, restricted cash is included as a component of cash, cash equivalents and restricted cash in the accompanying unaudited condensed consolidated statements of cash flows. ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents on a retrospective basis. The adoption did not have a material impact on the Company’s unaudited condensed consolidated statements of cash flows during the three months ended March 31, 2017. For the three months ended March 31, 2016, the beginning and ending balances for cash, cash equivalents and restricted cash increased by approximately $0.9 million.

Capitalization of Interest

The Company capitalizes interest to real estate inventories during the period that real estate is undergoing development. Interest capitalized as a cost of real estate inventories is included in cost of sales-homebuilding or cost of sales-land development as related homes or real estate are delivered.

Advertising Expenses:

The Company expenses advertising costs as incurred. Advertising expenses for the three months ended ~~September 30~~March 31, ~~2016~~2017 and ~~2015~~2016 were $0.52 million and $0.64 million, respectively~~, and for the nine months ended September 30, 2016 and 2015 were $1~~.~~5 million and $2.0 million, respectively.~~

Real Estate Inventories and Cost of Sales:

The Company capitalizes pre-acquisition costs, the purchase price of real estate, development costs and other allocated costs, including interest, during development and home construction. Pre-acquisition costs, including non-refundable land deposits, are expensed to cost of sales when the Company determines continuation of the related project is not probable. Applicable costs incurred after development or construction is substantially complete are charged to sales and marketing or general and administrative (“G&A”) expenses, as appropriate.

Land, development and other common costs are typically allocated to real estate inventories based on the number of homes to be constructed. Direct home construction costs are recorded using the specific identification method. Cost of sales-homebuilding includes the construction costs of each home and all applicable land acquisition, real estate development, capitalized interest and related allocated common costs. Changes to estimated total development costs subsequent to initial home closings in a community are allocated to remaining homes in the community. Cost of sales-land development includes land acquisition and development costs, capitalized interest, impairment charges, abandonment charges for projects that are no longer economically viable, and real estate taxes.

Real estate inventories are stated at cost, unless the carrying amount is determined not to be recoverable, in which case real estate inventories are written down to fair value.

All real estate inventories are classified as held until the Company commits to a plan to sell the real estate, the real estate can be sold in its present condition, the real estate is being actively marketed for sale and it is probable that the real estate will be sold within twelve months. Homes completed or under construction are included in real estate inventories in the accompanying unaudited condensed consolidated balance sheets at the lower of cost or net realizable value.

8Impairment and Abandonment of Real Estate Inventories

twelve months. Homes completed or under construction are included in real estate inventories in the accompanying unaudited condensed consolidated balance sheets at the lower of cost or net realizable value.

Impairment and Abandonment of Real Estate Inventories:

The Company evaluates real estate inventories for impairment when conditions exist suggesting that the carrying amount of real estate inventories is not fully recoverable and may exceed its fair value. Indicators of impairment include, but are not limited to, significant decreases in local housing market values, decreases in the selling 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. The Company prepares and analyzes cash flows at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets.

When estimating future cash flows of its real estate assets, the Company makes various assumptions, including: (i) expected sales prices and sales incentives (based on, among other things, an estimate of the number of homes available in the market, pricing and incentives, and potential sales 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 incurred to date and expected to be incurred (including, but not limited to, land and land development costs, home construction costs, indirect construction costs, and selling and marketing costs); (iv) alternative product offerings that may be offered that could have an impact on sales pace, sales price and/or building costs; and (v) alternative uses for the property.

If events or circumstances indicate that the carrying amount of real estate inventories may be impaired, such impairment will be measured based upon the difference between the carrying amount and the fair value of such asset(s) determined using the estimated future discounted cash flows, excluding interest charges, generated from the use and ultimate disposition of such asset(s). Such losses, if any, are reported within cost of sales for the period.

asset(s). Such losses, if any, are reported within cost of sales for the period.

We estimate the fair value of each impaired community by determining the present value of the estimated future cash flows at a discount rate commensurate with the risk of the respective community. In determining the fair value of land held for sale, management considers, among other things, prices for land in recent comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would pay for the land, and recent bona fide offers received from third parties.

During the three ~~and nine~~ months ended ~~September 30~~March 31, ~~2016~~2017, approximately $0.21 million ~~and $2.6 million, respectively,~~ of impairment losses were recorded~~. For~~ ~~the three months ended September 30, 2016, the impairment loss was recorded~~ with respect to the Company’s real estate inventories at its ~~Heathers~~Glenmoor ~~at Westport~~ community, located in ~~Charlotte~~Myrtle Beach, ~~North~~South Carolina (“~~Heathers at Westport~~Glenmoor”). As of ~~September~~March 3031, ~~2016~~2017, ~~the~~a ~~four~~model ~~remaining~~home ~~completed~~in ~~homes at~~ the ~~Heathers~~Glenmoor atproject ~~Westport~~suffered ~~project~~damages ~~had~~due to a ~~carrying~~fire ~~value~~resulting ~~that~~in ~~exceeded~~approximately ~~their~~$0.1 ~~estimated~~million ~~undiscounted~~in ~~cash~~impairment ~~flow~~loss. As aSee ~~result~~Note 8, ~~the~~“Fair ~~carrying~~Value ~~values~~Disclosures--Non-Financial ofInstruments ~~those~~Carried ~~remaining~~at ~~homes~~Fair ~~were~~Value--Non-Recurring ~~adjusted~~Estimated Fair Value of Real Estate Inventories” to ~~their~~the ~~estimated~~accompanying ~~fair~~unaudited ~~values,~~condensed ~~resulting~~consolidated infinancial anstatements ~~impairment~~for ~~loss~~a further discussion of ~~approximately~~the ~~$0.2~~impairment ~~million~~of the real estate asset.

~~For~~No ~~the~~such ~~nine months ended September 30, 2016, an additional $2.4 million of~~ real estate impairment ~~loss~~losses ~~was~~were recorded ~~during~~for the ~~second~~three ~~quarter~~months ofended ~~2016~~March ~~with respect to the Company’s real estate inventories at its Sundance community~~31, ~~located in Bakersfield, California (“Sundance”). The 65 lots at our Sundance project resulted in an impairment loss of $2.1 million during the second quarter of~~ 2016~~, as the carrying value of these lots was written down to the contractual sales price less costs to sell~~. In addition, as of June 30, 2016, homes under construction and completed homes at the Sundance project had a carrying value that exceeded their estimated undiscounted cash flows. As a result, the carrying values of those remaining homes not currently under contract were adjusted to their estimated fair values resulting in an impairment loss of approximately $0.3 million during the second quarter of 2016. See Note 8, “Fair Value Disclosures--Non-Financial Instruments Carried at Fair Value--Non-Recurring Estimated Fair Value of Real Estate Inventories” for a further discussion of the impairment of the real estate asset.

NoAbandonment ~~such~~charges ~~real~~during ~~estate~~the ~~impairment~~three ~~losses~~months ended March 31, 2017 and 2016 were ~~recorded~~$0.1 ~~for~~million and $0.4 million, respectively. Abandonment charges are included in cost of sales in the ~~three~~accompanying unaudited condensed consolidated statements of operations and ~~nine~~comprehensive ~~months~~income ~~ended~~or ~~September 30,~~loss ~~2015~~for the period in which they were recorded. These charges were related to the Company electing not to proceed with one or more land acquisitions after the incurrence of costs during due diligence.

Abandonment charges during the three months ended September 30, 2016 and 2015 were $31,000 and $144,000, respectively, and were $505,000 and $146,000 during the nine months ended September 30, 2016 and 2015, respectively. Abandonment charges are included in cost of sales in the accompanying unaudited condensed consolidated statements of operations and comprehensive income or loss for the period in which they were recorded. These charges were related to the Company electing not to proceed with one or more land acquisitions after the incurrence of costs during due diligence.

Goodwill and Other Intangible Assets:

The purchase price of an acquired business is allocated between the net tangible assets and intangible assets of the acquired business, with any residual purchase price recorded as goodwill. The determination of the value of the assets acquired and liabilities assumed involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.

Intangible assets with determinable useful lives are amortized on a straight-line basis over the estimated remaining useful lives (ranging from six months to five years), added to the value of land when an intangible option is used to purchase the land, or expensed in the period when the option is cancelled. Acquired intangible assets with contractual terms are generally amortized over their respective contractual lives. When certain events or changes in operating conditions occur, an impairment assessment is performed for the intangible assets. Goodwill is not amortized, but is evaluated annually for impairment or more frequently if events or circumstances indicate that goodwill may be impaired.

Impairment of Goodwill:

All goodwill has been attributed to the Southeast homebuilding reporting segment as part of the Citizens Acquisition, which was completed in 2014. In accordance with Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 350 - Goodwill, the Company evaluates goodwill for impairment annually or when conditions exist suggesting that the carrying amount of goodwill will more likely than not exceed its fair value. Indicators of impairment include, but are not limited to, significant decreases in economic conditions and market valuations, limitations on access to capital, and actual or projected cash flow losses or increases in cost factors that have a negative effect on earnings and cash flows. The Company prepares and analyzes cash flows at the project level for which there are identifiable cash flows.

If events or circumstances indicate that the carrying amount of goodwill may be impaired, such impairment will be measured based upon the difference between the carrying amount and the fair value and determined using the estimated future discounted cash flows, excluding interest charges. Such losses, if any, are reported as an expense in the accompanying unaudited condensed consolidated statements of operations and comprehensive income or loss for the period.

We estimate the fair value of goodwill by applying the income approach and determining the present value of the estimated future cash flows at a discount rate. When estimating future cash flows, the Company makes various assumptions, including, but not limited to: (i) forecasted adjusted pre-tax net income over a ten-year period; (ii) weighted average cost of capital; (iii) terminal growth; and (iv) revenue growth and operating profit margin.

Based on the above factors, the Company determined that the carrying value of goodwill exceeded its fair value. As a result, the Company recorded goodwill impairment of $4.2 million during the three months ended September 30, 2016 related to its Southeast operating segment. For the year ended December 31, 2015, there was no impairment of goodwill. See Note 5, “Intangible Assets--Goodwill” for a further discussion of the impairment of goodwill.

Fixed Assets, Net:

Fixed assets are carried at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated remaining useful lives of the assets. Computer software and hardware are depreciated over three to five years, office furniture and fixtures are depreciated over five years, vehicles are depreciated over five years and leasehold improvements are depreciated over the shorter of their useful life or lease term and range from one to five years. Maintenance and repairs are charged to expense as incurred, while significant improvements are capitalized. Depreciation expense is included in general and administrative (“G&A”) expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive income or loss.

Receivables:

Receivables include amounts recoverable from warranty insurance, amounts due from utility companies for reimbursement of costs, manufacturer rebates and reimbursable land development costs for general contracting services under a fixed price contract. As of September 30, 2016, approximately $1.1 million of estimated recoverable from warranty insurance was included in receivables. In addition, approximately $2.8 million of reimbursable land development costs under an option and development agreement executed during the third quarter of 2016 was recorded as a receivable. See Note 11, “Commitments and Contingencies--Purchase Commitments” for a further discussion of the option and development agreement.

AsIntangible ~~of September 30, 2016 and December 31, 2015, the Company had no allowance for doubtful accounts recorded.~~ Assets

~~Other~~Intangible ~~Assets:~~assets with determinable useful lives are amortized on a straight-line basis over the estimated remaining useful lives (ranging from six months to five years), added to the value of land when an intangible option is used to purchase the related land, or expensed in the period when the option is cancelled. Acquired intangible assets with contractual terms are generally amortized over their respective contractual lives. When certain events or changes in operating conditions occur, an impairment assessment is performed for the intangible assets.

Fixed Assets, Net

Fixed assets are carried at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated remaining useful lives of the assets. Computer software and hardware are depreciated over three to five years, office furniture and fixtures are depreciated over five years, vehicles are depreciated over five years and leasehold improvements are depreciated over the shorter of their useful life or lease term and range from one to five years. Maintenance and repairs are charged to expense as incurred, while significant improvements are capitalized. Depreciation expense is included in G&A expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive income or loss.

Receivables

The detail of receivables is set forth below (in thousands):



	March 31, 2017		December 31, 2016
Warranty insurance receivables	$	1,118	$	1,118
Manufacturer rebates	554		454
Reimbursement for land development work	1,760		4,016
Other receivables	245		40
Total	$	3,677	$	5,628

As of March 31, 2017 and December 31, 2016, the Company had no allowance for doubtful accounts recorded.

Other Assets

The detail of other assets is set forth below (in thousands):

	September 30, 2016		December 31, 2015
	March 31, 2017		December 31, 2016
Customer deposits in escrow	$	24,~~479~~475	$	12,~~834~~394
Prepaid expenses	~~823~~942		21,~~099~~098
Other deposits and prepaid interest	1,~~281~~595		~~466~~1,345
Funds held in escrow	~~1,490~~—		1,490
Other assets	~~330~~69		—
Total	$	67,~~403~~081	$	56,~~889~~327

~~As part of the Company’s adoption of Accounting Standards Update (“ASU”) 2015-03~~Homebuilding, ~~approximately~~Land ~~$1.5~~Development ~~million~~Sales ~~of unamortized debt issuance costs that were included in the prepaid expenses category of other assets as of December 31, 2015 have been reclassified from other assets to notes payable~~ and ~~senior~~Other ~~notes~~Revenues inProfit ~~the accompanying unaudited condensed consolidated balance sheets. See Note 7, “Notes Payable and Senior Notes, net” for a further discussion of the change in accounting principle.~~Recognition

~~Homebuilding~~In accordance with applicable guidance under Accounting Standards Codification (“ASC”) Topic 360 - Property, ~~Land~~Plant, ~~Development~~and Equipment, revenue from home sales and other real estate sales is recorded and any profit is recognized when the respective sales are closed. Sales are closed when all conditions of escrow are met, title passes to the buyer, appropriate consideration is received and ~~Other~~collection ~~Revenues~~of associated receivables, if any, is reasonably assured and ~~Profit~~the ~~Recognition:~~Company has no continuing involvement with the sold asset. The Company does not offer financing to any buyers. Sales price incentives are accounted for as a reduction of revenues when the sale is recorded. If the earnings process is not complete, the sale and any related profits are deferred for recognition in future periods. Any profit recorded is based on the calculation of cost of sales, which is dependent on an allocation of costs.

In accordance with applicable guidance under ASC Topic 360 - Property, Plant, and Equipment, revenue from home sales and other real estate sales is recorded and any profit is recognized when the respective sales are closed. Sales are closed when all conditions of escrow are met, title passes to the buyer, appropriate consideration is received and collection of associated receivables, if any, is reasonably assured and the Company has no continuing involvement with the sold asset. The Company does not offer financing to buyers. Sales price incentives are accounted for as a reduction of revenues when the sale is recorded. If the earnings process is not complete, the sale and any related profits are deferred for recognition in future periods. Any profit recorded is based on the calculation of cost of sales, which is dependent on an allocation of costs.

In addition to homebuilding and land development, the Company previously provided construction management services, pursuant to which it built homes on behalf of third-party property owners. The business was acquired in connection with the Citizens Acquisition and it was sold during the fourth quarter of 2015 and we no longer provide construction management services to third parties. Revenue and costs from providing these services for the three and nine months ended September 30, 2015 is included in other revenue and cost of sales-other revenue in the accompanying unaudited condensed consolidated statements of operations and comprehensive income or loss.

Stock-Based Compensation:

Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the period during which the award vests in accordance with applicable guidance under ASC Topic 718 - Compensation - Stock Compensation.

Stock Repurchase Program:

On June 6, 2016, our Board of Directors authorized the repurchase of up to $5.0 million of the Company’s Class A common stock between June 7, 2016 and June 1, 2018 (the “Stock Repurchase Program”). Treasury stock represents shares repurchased under the Stock Repurchase Program, which are reflected as a reduction in Stockholders’ Equity in accordance with ASC Topic 505-30 - Equity - Treasury Stock. The number of shares repurchased is based on the settlement date and factored into our weighted average calculation for earnings per share. See Note 9, “Equity--Stock Repurchase Program” for additional information regarding the Stock Repurchase Program. See Note 2, “Income or Loss Per Share” for details regarding the impact of treasury shares on earnings per share.

Warranty Reserves:

~~period in which the change in estimate occurs. The Company engaged a third~~Stock-~~party~~Based actuary during the third quarter of 2016 to assist in the analysis of warranty reserves based on historical data and industry trends for our communities. Warranty reserves are included in accrued liabilities in the accompanying unaudited condensed consolidated balance sheets. Compensation

Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the period during which the awards vest in accordance with applicable guidance under ASC Topic 718 - Compensation - Stock Compensation. See Note 9, “Equity--Stock-Based Compensation” to the unaudited condensed consolidated financial statements for further discussion on stock-based compensation.

As part of the Company’s adoption of Accounting Standards Update 2016-09 (“ASU 2016-09”), Compensation - Stock Compensation (Topic 718), the classification for the excess income tax benefit from stock based awards is presented as an operating activity on the accompanying unaudited condensed consolidated statements of cash flows. ASU 2016-09 provides clarification for certain share-based payment transactions and the classification of such transactions on the statement of cash flows and requires all amendments within ASU 2016-09 to be adopted in the same period. The adoption did not have a material impact on the Company’s unaudited condensed consolidated statements of cash flows during the three months ended March 31, 2017 and 2016.

Stock Repurchase Program

Our Board authorized the Stock Repurchase Program on June 6, 2016, to repurchase up to $5.0 million of the Company’s Class A common stock between June 7, 2016 and June 1, 2018. Treasury stock represents shares repurchased under the Stock Repurchase Program, which are reflected as a reduction in Stockholders’ Equity in accordance with ASC Topic 505-30 - Equity - Treasury Stock. The number of shares repurchased is based on the settlement date and factored into our weighted average calculation for earnings per share (“EPS”). See Note 9, “Equity--Stock Repurchase Program” to the unaudited condensed consolidated financial statements for additional information regarding the Stock Repurchase Program.

Warranty Reserves

Estimated future direct warranty costs are accrued and charged to cost of sales-homebuilding in the period in which the related homebuilding revenue is recognized. Amounts accrued are based upon estimates of the amount the Company expects to pay for warranty work. The Company assesses the adequacy of its warranty reserves on a quarterly basis and adjusts the amounts recorded, if necessary, in the period in which the change in estimate occurs. Annually, or more frequently as needed, the Company engages a third-party actuary to assist in the analysis of warranty reserves based on historical data and industry trends for our communities. Warranty reserves are included in accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.

Changes in warranty reserves are detailed in the table set forth below (in thousands):

	Three months ended September 30,						Nine months ended September 30,
	Three months ended March 31,
	2016			2015			2016			2015
	2017			2016
Warranty reserves, beginning of period	$	35,~~662~~642		$	2,~~149~~852		$	~~2,852~~		$	~~1,509~~
Warranty reserves accrued	~~611~~659			~~214~~471			~~1,655~~			~~888~~
Warranty expenditures	(~~209~~175		)	(51106		)	~~(443~~		)	~~(85~~		)
Additional reserves where corresponding amounts are recorded as receivables from insurance carriers	1,118			—			1,118			—
Warranty reserves, end of period	$	6,126		$	3,217
Warranty reserves, end of period	$	5,182		$	2,312		$	5,182		$	2,312

Consolidation of Variable Interest Entities:

The Company enters into purchase and option agreements for the purchase of real estate as part of the normal course of business. These purchase and option agreements enable the Company to acquire real estate at one or more future dates at pre-determined prices. The Company believes these acquisition structures reduce its financial risk associated with real estate acquisitions and holdings and allow the Company to better manage its cash position and return metrics.

In ~~February~~accordance ~~2015~~with ASC Topic 810, "Consolidation," the ~~FASB~~Company ~~issued~~assesses ~~ASU~~each ~~No.~~purchase ~~2015-02,~~agreement ~~Consolidation~~to ~~(Topic~~acquire ~~810):~~real ~~Amendments~~estate from an entity to ~~the~~determine ~~Consolidation~~if ~~Analysis~~a ~~(“ASU~~variable ~~2015-02”~~interest entity ("VIE"), may be created. Although the Company may not have legal title to ~~simplify~~the ~~consolidation~~underlying ~~accounting. ASU~~land, ~~2015-02~~if ~~amends~~the ~~current~~Company ~~consolidation~~determines ~~guidance~~that byit ~~modifying~~is the ~~evaluation~~primary beneficiary of ~~whether~~the ~~limited~~VIE, ~~partnerships~~the Company would consolidate the VIE in its accompanying consolidated financial statements and ~~similar~~reflect ~~legal~~such ~~entities~~assets ~~are~~and ~~variable~~liabilities ~~interest~~as ~~entities~~“Real orestate ~~voting~~inventories ~~interest~~not ~~entities,~~owned.” In ~~eliminating~~determining if the ~~presumption~~Company ~~that~~is athe ~~general~~primary ~~partner~~beneficiary, ~~should~~the ~~consolidate~~Company aconsiders, ~~limited~~among ~~partnership~~other things, ~~and~~whether ~~affects~~it has the ~~consolidation~~ability ~~analysis~~to control the activities of ~~reporting~~the ~~entities~~VIE that ~~are~~most ~~involved~~significantly ~~with~~impact ~~variable~~its ~~interest~~economic ~~entities~~performance. ~~All~~ ~~legal~~Such ~~entities~~activities include, but are ~~subject~~not limited to: ~~reevaluation~~the ~~under~~ability ~~the~~to ~~revised~~determine ~~consolidation~~the ~~model. ASU~~budget ~~2015-02~~or ~~was~~scope ~~effective~~of ~~for~~the VIE; the ~~Company~~ability to control financing decisions for ~~interim~~the VIE; and ~~annual~~the ~~reporting~~ability ~~periods~~to ~~beginning~~acquire ~~after~~or ~~December~~dispose ~~15,~~of ~~2015~~property owned or controlled by the VIE.

The Company adopted the provisions of ASU 2015-02 as of the effective date on January 1, 2016. The adoption of ASU 2015-02 did not have an impact on the Company's accompanying unaudited condensed consolidated balance sheet, results of operations or cash flows.

Based on the provisions of the relevant accounting guidance, the Company concluded that when it enters into a purchase agreement to acquire real estate from an entity, a variable interest entity (“VIE”) may be created. The Company evaluates all purchase and option agreements for real estate to determine whether a potential VIE has been formed. The applicable accounting guidance requires that for each potential VIE, the Company assess whether it is the primary beneficiary and, if it is, the Company would consolidate the VIE in its accompanying unaudited condensed consolidated financial statements in accordance with ASC Topic 810 - Consolidations, and reflect such assets and liabilities as “Real estate inventories not owned.”

In order to determine if the Company is the primary beneficiary, it must first assess whether it has the ability to control the activities of the VIE that most significantly impact its economic performance. Such activities include, but are not limited to: the ability to determine the budget and scope of land development work, if any; the ability to control financing decisions for the VIE; the ability to acquire additional land into the VIE or dispose of land in the VIE not under contract with the Company; and the ability to change or amend the existing option contract with the VIE. If the Company is not determined to control such activities, the Company is not considered the primary beneficiary of the VIE. If the Company does have the ability to control such activities, the Company will continue its analysis by determining if it is also expected to absorb a potentially significant amount of the VIE’s losses or, if no party absorbs the majority of such losses, if the Company will receive a disproportionate benefit from a potentially significant amount of the VIE’s expected gains.

In substantially all cases, land owners with which the Company has option agreements have no recourse against the Company and the maximum exposure to loss on the applicable option or purchase agreement is limited to non-refundable option deposits and any capitalized pre-acquisition costs. Some of the Company’s option or purchase deposits may be refundable to the Company if certain contractual conditions are not performed by the party selling the lots. The Company did not identify any VIEs from its evaluation of its purchase and option agreements for real estate. Therefore, the Company did not consolidate any land under option as of September 30, 2016 or December 31, 2015.

~~Income~~Based ~~Taxes:~~on the current provisions of the relevant accounting guidance, the Company evaluated its purchase and option agreements for real estate in place as of March 31, 2017 and December 31, 2016. None met consolidation criteria under the accounting guidance.

~~The~~Income Company’s provision for income tax expense includes federal and state income taxes currently payable and those deferred because of temporary differences between the income tax and financial reporting basis of the Company’s assets and liabilities. The asset and liability method of accounting for income taxes also requires the Company to reflect the effect of a tax rate change on accumulated deferred income taxes in income during the period in which the change is enacted.Taxes

InThe ~~assessing the realization of deferred income taxes, the~~ Company’s ~~considered~~provision ~~whether~~for ~~it is more likely than not that any deferred~~ income tax ~~assets~~expense ~~will~~includes befederal ~~realized. The~~and ~~realization~~state ~~of deferred tax assets is subject to the Company generating sufficient taxable~~ income ~~during~~taxes ~~the~~currently ~~periods~~payable inand ~~which~~those ~~the~~ deferred ~~tax~~because ~~assets~~of ~~become~~temporary ~~realizable.~~differences ~~Due~~between to the ~~Company's~~income ~~cumulative pre-~~tax ~~operating~~and ~~losses~~financial ~~generated~~reporting ~~prior~~basis ~~to 2015, the Company has recorded a valuation allowance against its U.S. deferred tax assets. As~~ of ~~September 30, 2016,~~ the ~~valuation allowance against the~~ Company’s ~~deferred tax~~ assets ~~was~~and ~~approximately $6~~liabilities.3 million. So long as the valuation allowance exists, income tax expense related to deferred tax assets will be offset by the associated valuation allowance, resulting in an effective U.S. income tax rate substantially different than statutory rates. The ~~Company~~asset ~~continues~~and toliability ~~evaluate~~method ~~all available evidence~~ of ~~sustained~~accounting ~~profitability in the business. The Company’s business was profitable in 2015 and~~ for ~~the~~income ~~first~~taxes ~~nine~~also ~~months~~requires ~~in 2016. During~~ the ~~fourth quarter of 2016, the~~ Company ~~will~~to ~~again~~reflect ~~evaluate all available evidence in determining~~ the ~~likelihood~~effect ~~that it will be able to realize all or some portion~~ of ~~its~~a ~~deferred~~ tax ~~assets~~rate ~~prior~~change toon ~~their~~accumulated ~~expiration. If, upon completing this evaluation, the Company concludes that it is more likely than not that the Company will be able to realize its~~ deferred ~~tax~~income ~~assets,~~taxes ~~the~~in ~~valuation~~income ~~allowance may be reversed at or before the end of the current year. If the Company were to reverse the valuation allowance, the Company would realize a one-time, non-cash tax benefit~~ in the period ofin ~~reversal. Prospectively,~~which the ~~Company~~change ~~would then expect to report an effective U.S. income tax rate that~~ is ~~closer to its statutory rates~~enacted.

The Company ~~recognizes~~evaluates ~~any~~deferred ~~uncertain income~~ tax ~~positions~~assets onregularly ~~income~~to ~~tax~~determine ~~returns~~if atadjustments ~~the largest amount that is more-likely-than-not~~ to beits ~~sustained~~valuation ~~upon~~allowance ~~audit~~are byrequired ~~the~~based ~~relevant~~on ~~taxing~~all ~~authority. An~~available ~~uncertain~~positive ~~income~~and ~~tax~~negative ~~position~~evidence ~~will~~to ~~not~~consider bewhether ~~recognized unless~~ it ~~has~~is amore ~~greater~~likely than ~~50% likelihood~~ ofnot ~~being~~that ~~sustained. The Company recognizes~~ any ~~interest~~of ~~and~~the ~~penalties~~deferred ~~related to uncertain~~ tax ~~positions~~assets inwill ~~income~~be ~~tax expense~~realized. ~~For~~ ~~each~~If ofit ~~the~~is ~~periods~~more ~~presented,~~likely ~~the~~than ~~Company did~~ not ~~record~~that ~~any~~some ~~interest~~ or ~~penalties~~all ~~related~~of tothe ~~uncertain~~deferred income tax ~~positions. See~~assets ~~Note~~will ~~12,~~not ~~“Income~~be ~~Taxes”~~realized, ~~for~~ a ~~further~~valuation ~~discussion~~allowance ofis ~~the Company’s income taxes for the applicable period~~recorded.

~~Noncontrolling~~During ~~Interest:~~the three months ended December 31, 2016, the Company evaluated all available evidence in determining the likelihood that it will be able to realize all or some portion of its deferred tax assets prior to their expiration. Upon completing this evaluation, the Company concluded that it is more likely than not that the Company will be able to realize its deferred tax assets. As of March 31, 2017, the Company continues to conclude that it is more likely than not that the Company will be able to realize its deferred tax assets.

The Company ~~reports~~recognizes ~~the~~any ~~share~~uncertain ofincome ~~its~~tax ~~results~~positions ofon ~~operations~~income tax returns at the largest amount that is ~~attributable~~more-likely-than-not to ~~other~~be ~~owners~~sustained ofupon ~~its~~audit ~~consolidated~~by ~~subsidiaries~~the ~~that~~relevant ~~are~~taxing ~~less~~authority. An ~~than~~uncertain ~~wholly-owned~~income astax ~~noncontrolling~~position ~~interest~~will innot ~~the~~be ~~accompanying~~recognized ~~unaudited~~unless ~~condensed~~it ~~consolidated~~has ~~financial~~a ~~statements. In~~greater ~~the~~than 50% likelihood ~~accompanying~~of ~~unaudited~~being ~~condensed~~sustained. ~~consolidated~~The ~~statements~~Company ofrecognizes ~~operations~~any interest and ~~comprehensive~~penalties ~~income~~related orto ~~loss,~~uncertain ~~the~~tax positions in income ortax ~~loss~~expense. ~~attributable~~For toeach of the ~~noncontrolling~~periods ~~interest~~presented, isthe ~~reported~~Company ~~separately,~~did ~~and~~not ~~the~~record ~~accumulated~~any ~~income~~interest or ~~loss~~penalties ~~attributable~~related to ~~the~~uncertain ~~noncontrolling~~tax ~~interest,~~positions. ~~along~~See ~~with~~Note ~~any~~12, ~~changes~~“Income inTaxes” ~~ownership~~to of the ~~subsidiary,~~unaudited iscondensed ~~reported~~consolidated asfinancial statements for a ~~component~~further discussion of ~~total~~the ~~equity~~Company’s income taxes for the applicable period.

~~Recently~~Price ~~Issued~~Participation ~~Accounting Standards:~~Interests

~~The~~Certain ~~following~~land ~~recently~~purchase ~~issued~~contracts ~~accounting~~and ~~standards~~other ~~are~~agreements ~~not~~include ~~yet~~provisions ~~required~~for additional payments to bethe ~~adopted~~land bysellers. ~~the~~These ~~Company~~additional payments are contingent on certain future outcomes, such as selling homes above a certain preset price or achieving an internal rate of ~~September 30~~return above a certain preset level. These additional payments, ~~2016:~~if triggered, are accounted for as cost of sales when they become due, however, they are neither fully determinable, nor due, until the transfer of title to the buyer is complete. Accordingly, no liability is recorded until the sale is complete.

Standard		Description		Date of Adoption		Application		Effect on the Consolidated Financial Statements(or Other Significant Matters)
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments(ASU 2016-15)		Provides guidance on eight specific cash flow classification issues that are currently not clear or included under GAAP: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle.		January 1, 2018;early adoption permitted		Retrospective		The Company is evaluating the method of adoption and the effect on its consolidated financial statements and related disclosures.

Noncontrolling Interest

~~Other~~The ~~than~~Company asreports ~~described~~the ~~above,~~share noof ~~new~~the ~~accounting~~results ~~pronouncement~~of ~~has~~operations ~~had~~that orare isattributable ~~expected~~ to ~~have~~other aowners ~~material~~of ~~impact~~its onconsolidated ~~the~~subsidiaries ~~Company’s~~that are less than wholly-owned as noncontrolling interest in the accompanying unaudited condensed consolidated financial statements. In the accompanying unaudited condensed consolidated statements of operations and comprehensive income or loss, the income or loss attributable to the noncontrolling interest is reported separately, and the accumulated income or loss attributable to the noncontrolling interest, along with any changes in ownership of the subsidiary, is reported as a component of total equity.

As of March 31, 2017 and December 31, 2016, the noncontrolling interest reported in the accompanying unaudited condensed consolidated financial statements includes PICO's share of 56.7% and 56.8%, respectively, of the income related to UCP, LLC. See Note 9, "Equity--Noncontrolling Interest" to the unaudited condensed consolidated financial statements for further discussion on noncontrolling interest.

Recently Issued Accounting Standards

There were no new accounting pronouncements as of March 31, 2017 that has had or is expected to have a material impact on the Company’s accompanying unaudited condensed consolidated financial statements. For a further discussion of recently issued accounting standards that are not yet required to be adopted by the Company, see the “Recently Issued Accounting Standards” disclosed in Company’s Annual Report on Form 10-K for the year ended December 31, 2016 that was filed with the SEC on March 3, 2017.

2. INCOME ~~OR LOSS~~ PER SHARE

Basic income ~~or loss~~ per share of Class A common stock is computed by dividing net income or loss attributable to UCP, Inc. by the weighted average number of shares of Class A common stock outstanding during the period. Diluted income ~~or loss~~ per share of Class A common stock is computed similarly to basic income ~~or loss~~ per share except that the weighted average number of shares of Class A common stock outstanding during the period is increased to include additional shares from the assumed exercise of any Class A common stock equivalents using the treasury stock method, if dilutive. The Company’s restricted stock units (“RSUs”) and stock options (“Options”) are considered Class A common stock equivalents for this purpose. For the three ~~and nine~~ months ended ~~September~~March 3031, ~~2016~~2017 and ~~three months ended September 30~~2016, ~~2015,~~ incremental Class A common stock equivalents ~~were~~of ~~included~~152,239 inand ~~calculating~~854 ~~diluted~~shares, ~~income~~respectively, ~~per share. No incremental Class A common stock equivalents~~ were included in calculating diluted ~~loss~~income per share ~~for the nine months ended September 30, 2016 because such inclusion would be anti-dilutive given the net loss attributable to UCP, Inc~~. ~~during such period.~~

Basic and diluted net income ~~or loss~~ per share of Class A common stock for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016 have been computed as follows (in thousands, except share and per share amounts):

	Three months ended September 30,				Nine months ended September 30,
	Three months ended March 31,
	2016		2015		2016		2015
	2017		2016
Numerator
Net income (loss) attributable to UCP, Inc.	$	1,285	$	1,639	$	2,087	$	(869	)
Net income attributable to UCP, Inc.	$	1,146	$	96
Denominator
Weighted average number of shares of Class A common stock outstanding - basic	7,~~948~~950,~~268~~723		78,~~995~~021,~~934~~747		~~7,993,371~~		~~7,950,700~~
Effect of dilutive securities:
RSUs	38152,~~148~~239		~~21,834~~854		~~50,459~~		—
Total shares for purpose of calculating diluted net income (loss) per share	7,986,416		8,017,768		8,043,830		7,950,700
Total shares for purpose of calculating diluted net income per share	8,102,962		8,022,601
Earnings (loss) per share:
Earnings per share:
Net income (loss) per share of Class A common stock - basic	$	0.16	$	0.21	$	0.26	$	(0.11	)
Net income per share of Class A common stock - basic	$	0.14	$	0.01
Net income (loss) per share of Class A common stock - diluted	$	0.16	$	0.20	$	0.26	$	(0.11	)
Net income per share of Class A common stock - diluted	$	0.14	$	0.01

The following RSUs and Options issued were excluded in the computation of diluted ~~earnings~~EPS ~~per share~~ for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016 because the effect would be anti-dilutive:

	Three months ended September 30,		Nine months ended September 30,
	Three months ended March 31,
	2016	2015	2016	2015
	2017	2016
Anti-dilutive securities	~~361~~454,~~774~~301	~~280~~190,~~148~~329	~~274,544~~	~~340,074~~

3. REAL ESTATE INVENTORIES

Real estate inventories consisted of the following (in thousands):

	September 30, 2016		December 31, 2015
	March 31, 2017		December 31, 2016
Deposits and pre-acquisition costs	$	710,~~730~~223	$	39,~~836~~232
Land held and land under development	~~133~~113,~~386~~004		~~128~~101,~~059~~609
Finished lots	~~113~~73,~~555~~350		~~117~~86,~~335~~622
Homes completed or under construction	~~102~~165,~~606~~081		89148,~~866~~627
Model homes	2427,~~426~~721		2127,~~893~~117
Total	$	~~381~~389,~~703~~379	$	~~360~~373,~~989~~207

Deposits and pre-acquisition costs include costs relating to land purchase or option contracts. Land held and land under development includes costs incurred during site development, such as land, development, indirect costs and permits. Homes completed or under construction and model homes include all costs associated with home construction, including land, development, indirect costs, permits and fees, and vertical construction.

As of ~~September~~March 3031, ~~2016~~2017, the Company had $710.72 million of deposits and pre-acquisition costs for 13,~~123~~743 lots with an aggregate purchase price of approximately $49124.14 million, net of deposits. As of December 31, ~~2015~~2016, the Company had $39.82 million of deposits and pre-acquisition costs for 12,~~127~~607 lots with an aggregate purchase price of approximately $80106.10 million, net of deposits.

As of ~~September~~March 3031, ~~2016~~2017 and December 31, ~~2015~~2016, the Company had completed homes included in inventories of approximately $2829.68 million and $3121.41 million, respectively, as shown in the charts below ($ in millions):

Interest Capitalization

Interest is capitalized on real estate inventories during construction and development. Interest capitalized is included in cost of sales in the Company’s accompanying unaudited condensed consolidated statements of operations and comprehensive income or loss as related sales are recognized. Amounts capitalized to home ~~inventory~~inventories and land ~~inventory~~inventories were as follows (in thousands):

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

2016

2015

2016

2015

2017

2016

Interest expense capitalized as cost of home inventory

2,~~573~~662

2,~~442~~368

~~7,748~~

~~6,877~~

Interest expense capitalized as cost of land inventory

~~606~~418

~~628~~575

~~1,551~~

~~1,620~~

Total interest expense capitalized

3,~~179~~080

32,~~070~~943

~~9,299~~

~~8,497~~

Previously capitalized interest expense included in cost of sales - homebuilding

(12,~~990~~350

)

(1,~~443~~539

)

~~(5,319~~

)

~~(3,367~~

)

Previously capitalized interest expense included in cost of sales - land development

(~~224~~11

)

—

~~(370~~

)

~~(49~~

)

Net activity of capitalized interest

~~965~~719

1,~~627~~404

~~3,610~~

~~5,081~~

Capitalized interest expense in beginning inventory

1517,~~919~~659

1013,~~753~~274

~~13,274~~

~~7,299~~

Capitalized interest expense in ending inventory

1618,~~884~~378

1214,~~380~~678

~~16,884~~

~~12,380~~

Interest is capitalized on real estate inventories during development. Interest capitalized is included in cost of sales in the Company’s accompanying unaudited condensed consolidated statements of operations and comprehensive income or loss as related sales are recognized.

4. FIXED ASSETS, NET

Net fixed assets consisted of the following (in thousands):

	September 30, 2016			December 31, 2015
	March 31, 2017			December 31, 2016
Computer hardware and software	$	2,~~018~~049		$	12,~~954~~043
Office furniture and equipment and leasehold improvements	~~888~~933			~~834~~911
Vehicles	83161			83
Total	23,~~989~~143			23,~~871~~037
Accumulated depreciation	(2,~~023~~288		)	(12,~~557~~154		)
Fixed assets, net	$	~~966~~855		$	~~1,314~~883

Depreciation expense for the three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015 was $131,000 and $151,000, respectively, and for the nine months ended September 30,~~ 2016 ~~and 2015~~ was $~~466~~135,000 and $~~438~~147,000, respectively. Depreciation expense is recorded in G&A expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive income or loss.

5. INTANGIBLE ASSETS

Other purchased intangible assets consisted of the following ~~(in thousands)~~:

	September 30, 2016							December 31, 2015
	March 31, 2017							December 31, 2016
	Gross Carrying Amount		Accumulated Amortization(Used)			Ending Balance		Gross Carrying Amount		Accumulated Amortization(Used)			Ending Balance
(in thousands)	Gross Carrying Amount		Accumulated Amortization			Ending Balance		Gross Carrying Amount		Accumulated Amortization			Ending Balance
Architectural plans	$	170	$	(86103	)	$	8467	$	170	$	(6094	)	$	~~110~~76
Land options	583		(545		)	38		583		(457		)	126
Land option	583		(568		)	15		583		(558		)	25
Trademarks and trade names	110		(110		)	—		110		(110		)	—
Total	$	753	$	(671	)	$	82	$	753	$	(652	)	$	101
	$	863	$	(741	)	$	122	$	863	$	(627	)	$	236

Amortization expense for the three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016 related to the architectural plans ~~and trademarks and trade names intangibles~~ was approximately $8,500 for both periods ~~and for the nine months ended September 30, 2016 and 2015 was $26,000 for both periods~~. The architectural plans intangible amortization period is 5 years. Amortization expense is recorded in G&A expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive income or loss. Future estimated amortization expense related to the architectural plans intangibles over the next five years is as follows (in thousands):cond

	December 31,
2016	$	8
2017	34
2018	34
2019	8
Total	$	84

~~Additionally,~~ensed ~~$40,000~~consolidated ~~and~~statements ~~$74,000~~of ~~related~~operations ~~to land options was capitalized to real estate inventories during the three~~ and ~~nine~~comprehensive ~~months~~income ~~ended~~or ~~September~~loss. ~~30,~~Future ~~2016,~~estimated ~~respectively,~~amortization asexpense ~~compared~~related to ~~$196,000~~the ~~and~~architectural ~~$279,000~~plans ~~for~~intangibles over the ~~three~~next ~~and~~five ~~nine~~years ~~months~~is ~~ended~~as ~~September 30, 2015, respectively.~~follows:

Goodwill



(in thousands)	December 31,
Remainder of 2017	$	25
2018	34
2019	8
Total	$	67

~~The~~Additionally, ~~changes~~$10,000 inrelated to land options was capitalized to real estate inventories during the ~~carrying~~three ~~amount~~months ofended ~~goodwill~~March 31, 2017, as compared to $20,000 for the ~~nine~~three months ended ~~September~~March 3031, 2016. For the three months ended March 31, 2017 and ~~2015~~2016, ~~were~~zero asand ~~follows~~$15,000, ~~(in~~respectively, ~~thousands):~~was related to abandonment.

	Goodwill
Balance at December 31, 2014	$	4,223
Goodwill impairment	—
Balance as of September 30, 2015	$	4,223
	Goodwill
Balance at December 31, 2015	$	4,223
Goodwill impairment	(4,223		)
Balance as of September 30, 2016	$	—

All goodwill has been attributed to the Southeast homebuilding reporting segment as part of the Citizens Acquisition, which was completed in 2014. For the three months ended September 30, 2016, the Company evaluated goodwill for impairment in light of qualitative indicators. These indicators included revised financial forecasts for the Southwest operating segment as a result of items including weather that delayed new community openings, abandonment of certain opportunities to open new communities as the opportunities did not meet our underwriting criteria, and lower margins on older communities still in existence from the land purchased as part of the acquisition. The Company determined as a result of these qualitative factors, that it should conduct a Step One Test analysis of goodwill. As a result of the Step One Test and subsequent Step Two Test, the Company determined that the carrying valu

e of goodwill exceeded its fair value, resulting in an impairment of goodwill. The fair value of goodwill was estimated by applying the income approach and determining the present value of the estimated future cash flows at a discount rate. When estimating future cash flows, the Company used key assumptions, including, but not limited to: (i) forecasted adjusted pre-tax net income over a ten-year period; (ii) weighted average cost of capital; (iii) terminal growth; and (iv) revenue growth and operating profit margin. The risk adjusted discount rate of 14.5% and terminal growth rate of 2.0% were applied to forecast adjusted pre-tax net income.

During the third quarter of 2016, the Company recorded goodwill impairment of $4.2 million. There was no goodwill impairment for the three and nine months ended September 30, 2015.

6. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

	September 30, 2016		December 31, 2015
(in thousands)	March 31, 2017		December 31, 2016
Real estate development cost to complete	$	916,~~694~~674	$	1110,~~992~~347
Accrued expenses	5,~~124~~424		5,~~692~~855
Warranty reserves (Note 1)	56,~~182~~126		25,~~852~~642
Contingent consideration (Note 11)	~~307~~360		~~2,707~~360
Accrued payroll liabilities	2,~~412~~414		13,~~373~~138
Total	$	2230,~~719~~998	$	2425,~~616~~342

7. NOTES PAYABLE AND SENIOR NOTES, NET

The Company obtains various types of debt financing in connection with its acquisition, development and construction of real estate inventories and its construction of homes. Often, these debt obligations are secured by the underlying real estate. Certain loans are funded in full at the initial loan closing and others are revolving facilities under which the Company may borrow, repay and reborrow up to a specified amount during the term of the loan. Acquisition indebtedness matures on various dates, but is generally repaid when lots are released from the lien securing the relevant loan based upon a specific release price, as defined in the relevant loan agreement, or the loan is refinanced. Construction and development debt is required to be repaid with proceeds from home closings based upon a specific release price, as defined in the relevant loan agreement.

Certain construction and development debt agreements include provisions that require minimum tangible net worth and liquidity; limit leverage and risk asset ratios; specify maximum loan-to-cost or loan-to-value ratios (whichever is lower). During the term of the loan, the lender may require the Company to obtain a third-party written appraisal of the fair value of the underlying real estate collateral. If the appraised fair value of the collateral securing the loan is below the specified minimum, the Company may be required to make principal payments in order to maintain the required loan-to-value ratios. As of ~~September~~March 3031, 2017 and December 31, 2016, the Company had approximately $~~228~~168.27 million and $164.0 million, respectively, of loan commitments ofrelated ~~which~~to its acquisition, development and construction loans (“ADC”). Of the total loan commitments, approximately $6981.64 million and $77.2 million, respectively, was available to usthe Company. As of ~~September~~March 3031, ~~2016~~2017 and December 31, ~~2015~~2016, the weighted average interest rate on the Company’s outstanding debt was 6.4851% and 6.3548%, respectively. Interest rates charged under the Company’s variable rate debt are based on the 30-day London Interbank Offered Rate (“LIBOR”) plus a spread ranging from 32.0075% to 3.75% or the U.S. Prime rate (“Prime”) plus a spread of 10.7599%.

OnThe ~~October~~Company’s ~~21,~~2017 ~~2014,~~Senior ~~the~~Notes ~~Company completed~~ (the ~~private~~“2017 ~~offering~~Notes”) ofwith $75.0 million in ~~aggregate~~ principal ~~amount~~outstanding ofmature ~~8.5%~~in ~~Senior~~October ~~Notes~~of ~~due~~ 2017, ~~(the~~and ~~“2017~~an ~~Notes”).~~additional ~~The net proceeds from the offering were approximately~~ $7230.51 million, ~~after~~in ~~paying~~ADC ~~the~~loans ~~debt~~are ~~issuance~~also ~~costs~~set ~~and~~to ~~offering~~mature ~~expenses.~~in ~~The net proceeds from~~ the ~~offering~~ordinary ~~were~~course ~~used for general corporate purposes, including financing construction~~ of ~~homes,~~business ~~acquisition~~during ~~of entitled land, development of lots and working capital~~2017. As ofWith ~~September 30,~~respect ~~2016,~~to the ~~Company~~$30.1 ~~was~~million in ~~compliance~~ADC ~~with~~loans, ~~the~~these ~~applicable~~loans ~~financial~~are ~~covenants~~project ~~under~~specific ~~the~~loans ~~indenture~~and ~~pursuant~~are scheduled to ~~which~~mature in the ~~2017~~ordinary ~~Notes~~course ~~were~~of ~~issued~~closing ~~and~~out ~~all~~ of ~~its other loan agreements.~~

The Senior Notes were issued under an Indenture, dated as of October 21, 2014 (the “Indenture”), among the Company, certain subsidiary guarantors and Wilmington Trust, National Association, as trustee. The Senior Notes bear interest at 8.5% per annum, 17

18the sales phase for each of these projects and we anticipate the sales proceeds from the designated home closings will provide a more than adequate source of cash for the repayment of these loans. For the 2017 Senior Notes our existing available cash, available borrowing capacity and cash expected to be generated from our backlog of home sales will be sufficient to repay this obligation when due.

~~payable~~On onOctober ~~March~~21, 312014, ~~June~~the ~~30,~~Company ~~September~~completed 30the ~~and~~private ~~December~~offering 31of $75.0 million in aggregate principal amount of ~~each~~the ~~year~~8. ~~The~~5% ~~Senior~~2017 Notes. ~~mature~~The onnet ~~October~~proceeds 21from the offering were approximately $72.5 million, ~~2017~~after paying the debt issuance costs and offering expenses. The net proceeds from the offering were used for general corporate purposes, ~~unless~~including ~~earlier~~financing ~~redeemed~~construction orof ~~repurchased~~homes, acquisition of entitled land, development of lots and working capital.

AsThe 2017 Notes were issued under an Indenture, dated as of ~~September 30~~October 21, ~~2016~~2014 (the “Indenture”), among the Company, ~~was~~certain insubsidiary ~~compliance~~guarantors ~~with~~and ~~the~~Wilmington ~~applicable~~Trust, ~~financial~~National ~~covenants~~Association, ~~under~~as ~~the~~trustee. ~~Indenture~~The 2017 Notes bear interest at 8.5% per annum, payable on March 31, June 30, September 30 and ~~all~~December 31 of ~~its~~each ~~loan~~year. ~~agreements~~The 2017 Notes mature on October 21, 2017, unless earlier redeemed or repurchased.

As of March 31, 2017, the Company was in compliance with the applicable financial covenants under the Indenture and all of its loan agreements.

Notes payable and 2017 Notes consisted of the following (in thousands):

	September 30, 2016			December 31, 2015
Variable Interest Rate:	March 31, 2017			December 31, 2016
Variable Interest Rate:
LIBOR + 3.50% through 2017 (a)	3,894			4,693
LIBOR + 3.75% through 2016 (a)	$	4,856		$	30,132
LIBOR + 3.75% through 2017 (a)	20,558			31,533
Prime + 1.75% through 2016 (b)	—			717
Prime + 0.25% through 2018 (b)	2,338			—
LIBOR + 3.00% through 2016 (a)	—			4,832
LIBOR + 2.75% through 2018 (a)	8,700			10,500
LIBOR + 3.50% through 2017 (a)	5,256			9,785
LIBOR + 3.75% through 2018 (a)	42,073			26,444
LIBOR + 3.75% through 2017 (a)	35,661			21,732
5.50% through 2017	1,844			2,476
LIBOR + 3.75% through 2018 (a)	23,086			1,120
5.00% through 2017	3,807			5,607
5.50% through 2016	3,350			2,342
Total variable notes payable	$	83,214		$	81,253
5.00% through 2017	6,021			4,581
Fixed Interest Rate:	March 31, 2017			December 31, 2016
Total variable notes payable	$	78,230		$	75,241
10.00% through 2017	$	—		$	1,604
Fixed Interest Rate:
10.00% through 2017	$	1,604		$	1,604
0.00% through 2017	—			1,935
8.00% through 2018	4,000			4,000
Total fixed notes payable	$	54,~~604~~000		$	75,~~539~~604
Senior Notes, net	74,831			74,710
Senior notes, net of discount	74,911			74,871
Total notes payable and senior notes	$	~~158~~162,~~665~~125		$	~~157~~161,~~490~~728
Debt issuance costs	(880		)	(1,524		)
Debt issuance costs (c)	(574		)	(734		)
Total notes payable and senior notes, net	$	~~157~~161,~~785~~551		$	~~155~~160,~~966~~994

(a) LIBOR is the 30-day London Interbank Offered Rate. As of ~~September 30~~March 31, ~~2016~~2017, LIBOR was 0.~~53111~~98278%~~; loans bear interest at LIBOR plus a spread ranging from 3~~.~~00% to 3.75%.~~

(b) Prime is the U.S Prime Rate. At ~~December~~ March 31, ~~2015~~2017, Prime was 34.5000% ~~plus 1~~.~~75%.~~

As(c) ofDebt ~~September 30,~~issuance ~~2016,~~costs ~~principal~~for ~~maturities~~non-revolver ofloans ~~notes~~were ~~payable~~$0.6 million and ~~2017~~$0.7 ~~Notes~~million ~~for~~as ~~the~~of ~~years~~March ~~ending December~~ 31, ~~are~~2017 asand ~~follows~~December ~~(in~~31, ~~thousands):~~2016, respectively.

2016	$	8,206
2017	123,373
2018	27,086
2019 and thereafter	—
Total	$	158,665

19As of March 31, 2017, principal maturities of notes payable and senior notes for the years ending December 31 are as follows:



(in thousands)	December 31,
2017	$	105,014
2018	57,111
2019 and thereafter	—
Total	$	162,125

8. FAIR VALUE DISCLOSURES

The accounting guidance regarding fair value disclosures defines fair value as the price that would be received for selling an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions.

The Company determines the fair values of its financial instruments based on the fair value hierarchy established in accordance with ASC Topic 820 - Fair Value Measurements, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:


•	Level 1—Quoted prices for identical instruments in active markets


•	Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at measurement date


•	Level 3—Valuations derived from techniques where one or more significant inputs or significant value drivers are unobservable in active markets at measurement date

Estimated Fair Value of Financial Instruments Not Carried at Fair Value

As of ~~September~~March 3031, ~~2016~~2017 and December 31, ~~2015~~2016, the fair values of cash and cash equivalents, accounts payable and receivable approximated their carrying values because of the short-term nature of these assets ~~and~~or liabilities. The estimated fair value of the Company’s debt is based on cash flow models discounted at current market interest rates for similar instruments, which are based on Level 3 inputs. There were no transfers between fair value hierarchy levels during the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017 or the year ended December 31, ~~2015~~2016.

The following presents the carrying value and fair value of the Company’s financial instruments ~~which~~that are not carried at fair value ~~(in thousands)~~:

		September 30, 2016				December 31, 2015
		March 31, 2017				December 31, 2016
	Level in Fair Value Hierarchy	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
(in thousands)	Level in Fair Value Hierarchy	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Notes Payable	Level 3	$	83,834	$	86,671	$	82,780	$	84,712
Notes payable	Level 3	$	87,214	$	87,458	$	86,857	$	86,843
2017 Notes	Level 3	74,831		80,705		74,710		82,057
2017 notes	Level 3	74,911		74,900		74,871		74,838
Total Debt		$	158,665	$	167,376	$	157,490	$	166,769
Total debt		$	162,125	$	162,358	$	161,728	$	161,681

The estimated fair value of the Company's debt is the present value of the contractual debt payments, based on cash flow models, discounted at the then-current interest rates, plus an estimate of the then-current credit spread, which is an estimate of the rate at which the Company could obtain replacement debt. These parameters are Level 3 inputs in the fair value hierarchy. To estimate the contractual cash flows, discount rates, and thereby the debt fair value, the Company considers various internal and external factors including: (1) loan economic data, (2) collateral performance, (3) market interest rate data, (4) the discount curve and implied forward rate curve, and (5) other factors, which may include market, region and asset type evaluations. While the Company considered rates on existing and recently closed loan facilities in addition to the current refinancing fixed rate as of March 31, 2017, these unobservable inputs were not incorporated into its final estimate of fair value.

2019

Recurring Financial Instruments Carried at Fair Value

The following presents the Company’s recurring financial instruments that are carried at fair value (in thousands):

Description

Level 1

Level 2

Level 3

Balance asat ofMarch ~~September 30~~31, ~~2016~~2017

Contingent consideration

—

~~307~~360

Description

Level 1

Level 2

Level 3

Balance asat of December 31, ~~2015~~2016

Contingent consideration

—

~~2,707~~360

Estimated Fair Value of Contingent Consideration

The change in estimated fair value of the contingent consideration relating to our 2014 acquisition of the assets and liabilities of Citizens Homes, Inc. used in the purchase of real estate and the construction and marketing of residential homes in North Carolina, South Carolina and Tennessee (the “Citizens Acquisition”) for the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016 consisted of the following (in thousands):

	Contingent Consideration
Balance as of December 31, 2014	$	3,525
Change in fair value	(818		)
Balance as of September 30, 2015	$	2,707
	Contingent Consideration
Balance as of December 31, 2015	$	2,707
Change in fair value	~~(2,400~~8		)
Balance as of September 30, 2016	$	307
Balance as of March 31, 2016	$	2,715
	Contingent Consideration
Balance as of December 31, 2016	$	360
Change in fair value	—
Balance as of March 31, 2017	$	360

The ~~fair~~contingent ~~value~~consideration ofarrangement relating to Citizens Acquisition requires the ~~contingent~~Company ~~consideration~~to pay up to a maximum of $06.30 million asof additional consideration based upon the achievement of ~~September 30,~~various ~~2016~~pre-tax ~~was~~net ~~estimated~~income ~~based~~performance onmilestones ~~significant~~("performance ~~inputs~~milestones") ~~that~~by ~~are~~the ~~not~~assets ~~observable~~acquired in the ~~market,~~Citizens ~~which~~Acquisition ~~ASC~~over ~~Topic~~a ~~820~~ five-year ~~Fair~~period ~~Value~~that ~~Measurements,~~commenced ~~refers~~on toApril as1, ~~Level~~2014. 3Payout ~~inputs. Key~~calculations ~~assumptions~~are ~~include:~~made ~~(1)~~based ~~forecast~~on ~~adjusted~~calendar ~~pre-tax~~year ~~net~~performance ~~income~~except ~~over~~for the ~~contingent~~sixth ~~consideration~~payout ~~period;~~calculation ~~(2)~~which ~~revenue~~will ~~appreciation;~~be ~~(3)~~calculated ~~cost~~based ~~inflation;~~on ~~and~~the ~~(4)~~achievement ~~sales~~of ~~and~~performance ~~marketing~~milestones ~~and~~from ~~general~~January ~~and~~1, ~~administrative~~2019 ~~(“SG&A”)~~through ~~expenses~~March 25, 2019. ~~The~~ ~~estimated~~Payouts ~~revenue~~are ~~appreciation~~made ofon 4an annual basis.~~5%,~~ ~~cost~~The ~~inflation~~potential undiscounted amount of ~~1.5%,~~all ~~and~~future ~~SG&A~~payments ~~expenses~~that ~~were~~the ~~applied~~Company tocould ~~forecast~~be ~~adjusted~~required ~~net~~to ~~income~~make ~~over~~under the contingent consideration ~~period.~~arrangement ~~See~~is ~~Note~~between ~~11,~~$0 ~~“Commitments~~ and ~~Contingencies”~~$6 ~~for further discussion of contingent consideration~~million.

The fair value of the contingent consideration of $0.4 million as of March 31, 2017 was estimated based on applying the weighted probability of achievement of the performance milestones. There was no change in estimated fair value of the contingent consideration for the three months ended March 31, 2017. For the three months ended March 31, 2016, the change in estimated fair value of the contingent consideration was $8,000.

The fair value of the contingent consideration of $0.4 million as of March 31, 2017 was estimated based on significant inputs that are not observable in the market, which ASC Topic 820 - Fair Value Measurements, refers to as Level 3 inputs. Key assumptions include: (1) forecast adjusted pre-tax net income over the contingent consideration period; (2) revenue appreciation; (3) cost inflation; and (4) sales and marketing and general and administrative (“SG&A”) expenses. The estimated revenue appreciation of 4.5%, cost inflation of 1.5%, and SG&A expenses were applied to forecast adjusted net income over the contingent consideration period.

The fair value of the contingent consideration of $2.7 million as of March 31, 2016 was estimated based on applying the income approach and a weighted probability of achievement of the performance milestones. The estimated fair value of the contingent consideration was calculated by using a Monte Carlo simulation. The measurement is based on significant inputs that are not observable in the market, which ASC Topic 820 - Fair Value Measurements, refers to as Level 3 inputs. Key assumptions include: (1) forecast adjusted pre-tax net income over the contingent consideration period; (2) risk-adjusted discount rate reflecting the risk inherent in the forecast adjusted pre-tax net income; (3) risk-free interest rates; (4) volatility of adjusted pre-tax net income; and (5) the Company’s credit spread. The risk-adjusted discount rate applied to forecast adjusted net income was 12.7% plus the applicable risk-free rate, resulting in a discount rate ranging from 12.7% to 13.2% over the contingent consideration period. The estimated volatility rate of 18.6% and a credit spread of 11.0% were applied to forecast adjusted net income over the contingent consideration period.

Non-Financial Instruments Carried at Fair Value

Non-financial assets and liabilities include items such as inventory and long lived assets that are measured at fair value, on a nonrecurring basis, when events and circumstances indicate the carrying value is not recoverable. ~~See Note 11, "Commitments and Contingencies" for a discussion of the non-financial measurements applied to the Citizens Acquisition included elsewhere in this report.~~

Non-Recurring Estimated Fair Value of Real Estate Inventories

~~During the third quarter of 2016, the Company had a non-recurring fair value measurement for the construction of Heathers at Westport.~~ The ~~Company~~following ~~recorded~~presents ~~an impairment loss of $0.2 million with respect to~~ the Company’s ~~real~~non-financial ~~estate~~instruments ~~inventories~~that atwere ~~Heathers~~measured at ~~Westport~~fair ~~for the remaining four homes and the carrying~~ value, ofon ~~these~~a ~~homes~~non-recurring ~~was~~basis, ~~written~~by ~~down~~level towithin ~~their~~the fair value~~. For~~ ~~the~~hierarchy ~~three~~(in ~~and nine months ended September 30, 2016, impairment losses of $0.2 million and $2.6 million, respectively, were recorded to real estate inventories.~~ thousands):



Description	Level 1	Level 2	Level 3		Total Impairment During the Three Months Ended March 31, 2017
Real estate and development costs - Glenmoor model home			$	—	$	102

Description	Level 1	Level 2	Level 3		Total Impairment During the Year Ended December 31, 2016
Real estate and development costs - Heathers at Westport project			$	1,066	$	192
Real estate and development costs - Sundance project			$	5,782	$	2,397

For the three months ended March 31, 2017, the Company had a non-recurring fair value measurement that resulted in a real estate impairment loss at its Glenmoor project in South Carolina. During the three months ended March 31, 2017, the Company recorded an impairment loss of $0.1 million with respect to the Company’s real estate inventories at Glenmoor for the model home that suffered damages due to a fire. The carrying value of Glenmoor model home was written down to its fair value. See Note 1, “Organization, Basis of Presentation and Summary of Significant Accounting Policies” to the accompanying unaudited condensed consolidated financial statements for further discussion on impairment of real estate inventories.

There were no such real estate impairment losses recorded for the three months ended March 31, 2016.

There were no other non-financial fair value measurements for the three months ended March 31, 2017 and year ended December 31, 2016.

The following presents the Company’s non-financial instruments that are carried at fair value (in thousands):

Description	Level 1	Level 2	Level 3		Balance as of September 30, 2016		Total Impairment During the Nine Months Ended September 30, 2016
Real estate and development costs - Heathers at Westport project			$	1,066	$	1,066	$	192
Real estate and development costs - Sundance project			$	1,128	$	1,128	$	2,397
Real estate and development costs - River Run project			$	3,300	$	3,300	$	—
Description	Level 1	Level 2	Level 3		Balance as of December 31, 2015		Total Impairment During the Twelve Months Ended December 31, 2015
Real estate and development costs - Heathers at Westport project			$	975	$	975	$	—
Real estate and development costs - Sundance project			$	9,448	$	9,448	$	—
Real estate and development costs - River Run project			$	5,960	$	5,960	$	923

There were no such real estate impairment losses recorded for the three and nine months ended September 30, 2015. For the year ended December 31, 2015, an impairment of $923,000 was recorded to homebuilding real estate inventory in the River Run project, located in Bakersfield, California, to adjust its carrying value to its estimated fair value as of the date of the impairment.

9. EQUITY

Noncontrolling Interest

As of ~~September~~March 3031, 2017 and December 31, 2016, the Company ~~holds~~held an ~~approximately 43.1%~~ economic interest in UCP, LLC and is its sole managing member; of approximately 43.3% and 43.2%, respectively. The noncontrolling interest reported in the accompanying unaudited condensed consolidated financial statements includes PICO’s 56.7% and 56.8% share of the income related to UCP, LLC isas ~~fully~~of ~~consolidated~~March 31, 2017 and December 31, 2016, respectively.

The carrying value and ending balance as of ~~September~~March 3031, 2017 and December 31, 2016 of the noncontrolling interest was calculated as follows (in thousands):

Beginning balance of noncontrolling interest as of December 31, 2015	$	127,208
	March 31, 2017			December 31, 2016
Net income attributable to noncontrolling interest	3,109
Beginning balance of noncontrolling interest	$	126,258		$	127,208
Re-allocation of stock issuances	(1,909		)
Net income attributable to noncontrolling interest	2,310			5,210
Stock-based compensation attributable to noncontrolling interest	423
Re-allocation of stock issuances	(411		)	(1,962		)
Stock issuance attributable to noncontrolling interest	(25		)
Stock-based compensation expense attributable to noncontrolling interest	236			657
Distribution to noncontrolling interest	(4,830		)
Stock issuance attributable to noncontrolling interest	(158		)	(25		)
Ending balance of noncontrolling interest as of September 30, 2016	$	123,976
Distribution to noncontrolling interest	(1,909		)	(4,830		)
Ending balance of noncontrolling interest	$	126,326		$	126,258

The distribution to the noncontrolling interest relates to cash distributions, which we refer to as “tax distributions,” that UCP, LLC is obligated to make as noted in the Company’s Annual Report on Form 10-K that was filed with the ~~Securities~~SEC ~~and Exchange Commission~~ on March 143, ~~2016~~2017.

Stock Repurchase Program

As part of the Board approved Stock Repurchase Program, between June 7, 2016 and June 1, 2018, management is authorized to repurchase up to $5.0 million of the Company’s Class A common stock in open market purchases, privately negotiated transactions or other transactions. The Stock Repurchase Program is subject to prevailing market conditions and other considerations, including our liquidity, the terms of our debt instruments, planned land investment and development spending, acquisition and other investment opportunities and ongoing capital requirements.

22Since inception of the program through March 31, 2017, the Company repurchased an aggregate of 146,346 shares of Class A common stock for total consideration of $1.2 million, inclusive of commissions. The remaining value of shares that may be repurchased under the Stock Repurchase Program as of March 31, 2017 is approximately $3.8 million. For the three months ended March 31, 2017, the Company had no stock repurchases.

Since inception of the program through September 30, 2016, the Company repurchased an aggregate of 123,636 shares of Class A common stock for total consideration of $1.0 million, inclusive of commissions. The remaining value of shares that may be repurchased under the Stock Repurchase Program as of September 30, 2016 is approximately $4.0 million. The Company previously did not have a stock repurchase program, therefore there were no stock repurchases for the year ended December 31, 2015.

Re-Allocation from Stock Issuances

The Company allocates Class A common stock issued in connection with the vesting of RSUs issued under the UCP, Inc. 2013 Long-Term Incentive Plan (the “LTIP”) and stock-based compensation expense between additional paid-in-capital and noncontrolling interest within its accompanying unaudited condensed consolidated statements of equity. The equity allocations for the noncontrolling interest are based on the economic and voting interest percentages of the Company and its noncontrolling interest holder, PICO. Issuances of Class A common stock for RSUs affect the economic and voting interest percentages, which accordingly are adjusted at the end of each issuance period. The economic and voting interest percentages prevailing during the period are used to determine the current period equity allocations for the noncontrolling interest.

Stock-Based Compensation

The LTIP was adopted in July 2013 and provides for the grant of equity-based awards, including options to purchase shares of Class A common stock, Class A stock appreciation rights, Class A restricted stock, Class A RSUs and performance awards. The LTIP automatically expires on the tenth anniversary of its effective date. The Company’s board of directors may terminate or amend the LTIP at any time, subject to any stockholder approval required by applicable law, rule or regulation.

The number of shares of the Company’s Class A common stock authorized under the LTIP was 1,834,300 shares. To the extent that shares of the Company’s Class A common stock subject to an outstanding option, stock appreciation right, stock award or performance award granted under the LTIP are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or the settlement of such award in cash, then such shares of the Company’s Class A common stock generally shall again be available under the LTIP, subject to certain exceptions.

The RSUs and Options granted to the Company’s employees during the year ended December 31, 2014 are subject to the following vesting schedule: a) 10% vested on the first anniversary of the grant date, b) 20% vest on second anniversary of the grant date, c) 30% vest on the third anniversary of the grant date, and ~~d) 40% vest on the fourth anniversary of the grant date. The RSUs granted to the Company’s employees and~~ certain members of the Company’s board of directors ~~during the three months ended June 30, 2016~~ are subject to the following vesting schedule: a) 20% vest on the first anniversary of the grant date, b) 20% vest on second anniversary of the grant date, c) 20% vest on the third anniversary of the grant date, d) 20% vest on the fourth anniversary of the grant date, and e) 20% vest on the fifth anniversary of the grant date. The RSUs granted to the Company’s board of directors during the three months ended September 30, 2016 are subject to the following vesting schedule: a) 25% vested on August 5, 2016, b) 25% vest on November 4, 2016, c) 25% vest on February 3, 2017, and d) 25% vest on May 4, 2017.

During the three and nine months ended September 30, 2016, the Company recognized $0.3 million and $0.7 million of stock-based compensation expense, respectively, which was included in G&A expenses in the accompanying unaudited condensed consolidated statements of operations and other comprehensive income or loss. For the three and nine months ended September 30, 2015, the Company recognized $0.3 million and $1.6 million of stock-based compensation expense, respectively.



Grant period	Award(s) Granted	Grant Recipient(s)	Vesting Schedule
Year ended December 31, 2014	RSUs and Options	Company’s employees	a) 10% vested on the first anniversary of the grant date, b) 20% vest on second anniversary of the grant date, c) 30% vest on the third anniversary of the grant date, and d) 40% vest on the fourth anniversary of the grant date

Second quarter of 2016	RSUs	Company’s employees	a) 20% vested on the first anniversary of the grant date, b) 20% vest on second anniversary of the grant date, c) 20% vest on the third anniversary of the grant date, d) 20% vest on the fourth anniversary of the grant date, and e) 20% vest on the fifth anniversary of the grant date

Third quarter of 2016	RSUs	Certain members of the Company’s board of directors	a) 25% vested on August 5, 2016, b) 25% vest on November 4, 2016, c) 25% vest on February 3, 2017, and d) 25% vest on May 4, 2017

First quarter of 2017	RSUs	Company’s employees	a) 20% vested on the first anniversary of the grant date, b) 20% vest on second anniversary of the grant date, c) 20% vest on the third anniversary of the grant date, d) 20% vest on the fourth anniversary of the grant date, and e) 20% vest on the fifth anniversary of the grant date

The grant-date fair value of the RSUs granted during the three months ended March 31, 2017 was $4.5 million. There were no Options granted during the three months ended March 31, 2017. For the three months ended March 31, 2016, there were no RSUs nor Options granted.

During the three months ended March 31, 2017, the Company recognized $0.4 million of stock-based compensation expense, which was, included in G&A expenses in the accompanying unaudited condensed consolidated statements of operations and other comprehensive income or loss. For the three months ended March 31, 2016, the Company recognized $0.2 million of stock-based compensation expense.

The following table summarizes the Options activity for the three months ended March 31, 2017 and 2016:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)(1)
Outstanding as of December 31, 2015	149,605		$	16.20	8.20	—
Outstanding at December 31, 2015	149,605		$	16.20	8.20	—
Options granted	—		—		—	—
Options exercised	—		—		—	—
Options forfeited	—		—		—	—
Options expired	(32,953	)	—		—	—
Outstanding at March 31, 2016	149,605		$	16.20	7.90	—
Outstanding as of September 30, 2016	116,652		$	16.20	7.40	—
Outstanding at December 31, 2016	116,652		$	16.20	7.20	—
Options vested and exercisable as of September 30, 2016	34,996		$	16.20	—	—
Options granted	—		—		—	—
Options vested and expected to vest as of September 30, 2016	108,486
Options exercised	—		—		—	—
Options forfeited	—		—		—	—
Outstanding at March 31, 2017	116,652		$	16.20	6.90	—
Options vested and exercisable as of March 31, 2017	69,992		$	16.20	—	—
Options expected to vest as of March 31, 2017	46,660

(1) The aggregate intrinsic value is calculated as the amount by which the fair value of the underlying stock exceeds the exercise price of the Option. The fair value of the Company’s Class A common stock as of ~~September 30~~March 31, ~~2016~~2017 was $810.8115 per share.

The Company uses the Black-Scholes option pricing model to determine the fair value of Options. During the nine months ended September 30, 2016, the Company had 32,953 vested Options that expired in the second quarter of 2016 based on the Resignation Agreement with the Company’s former Chief Financial Officer and Treasurer.

The following table summarizes the RSU activity for the ~~nine~~three months ended ~~September~~March 3031, 2017 and 2016:

	Number of Shares		Weighted Average Grant Date Fair Value (per share)
Outstanding and unvested as of December 31, 2015	48,531		$15.99
Outstanding and unvested at December 31, 2015	48,531		$15.99
Granted	~~271,635~~—		~~8.04~~—
Vested	(2718,~~850~~610	)	13$16.4220
Forfeited	—		—
Outstanding and unvested as of September 30, 2016	292,316		$8.85
Outstanding and unvested at March 31, 2016	29,921		$15.86
Outstanding and unvested at December 31, 2016	284,313		$8.88
Granted	383,288		$	11.70
Vested	(85,387	)	$	9.22
Forfeited	—		—
Outstanding and unvested at March 31, 2017	582,214		$10.69

Unrecognized compensation cost for RSUs and Options issued under the LTIP was $26.41 million (net of estimated forfeitures) as of ~~September~~March 3031, ~~2016~~2017; approximately $25.08 million of the unrecognized compensation costs related to RSUs and $0.43 million related to Options. The compensation expense is expected to be recognized over a weighted average period of 34.54 years for the RSUs and 10.49 years for the Options.

10. SEGMENT INFORMATION

The Company ~~has~~segmented its operating activities into two operating segments, West and Southeast, and two reportable segments, Homebuilding and Land development.



Operating Segments	Reportable Segments	State
West	Homebuilding	California, Washington
	Land development	California, Washington
Southeast	Homebuilding	North Carolina, South Carolina, Tennessee
	Land development	North Carolina, South Carolina, Tennessee

Each reportable segment includes real estate with similar economic characteristics, including similar historical and expected long-term gross margin percentages, product types, geography, production processes and methods of distribution.

24The reportable segments follow the same accounting policies as the accompanying unaudited condensed consolidated financial statements described in Note 1, “Organization, Basis of Presentation and Summary of Significant Accounting Policies.” Operating 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.

The ~~reportable~~Company ~~segments~~evaluates ~~follow~~the performance of the ~~same~~operating ~~accounting~~segments ~~policies~~based ~~described~~on ina ~~Note 1~~number of factors, ~~“Organization~~including, ~~Basis~~but not limited to, gross margin. “Gross Margin” is defined as operating revenues less cost of ~~Presentation~~sales (cost of construction and ~~Summary~~acquisition, interest, abandonment, impairment and other cost of ~~Significant~~sales ~~Accounting~~related ~~Policies~~expenses).~~” Operating~~ ~~results~~Corporate ofsales, ~~each~~G&A ~~reportable~~expense and non-segment gains or losses are ~~not~~reflected ~~necessarily~~within ~~indicative~~overall ofcorporate ~~the~~expenses, ~~results~~as ~~that~~this ~~would~~constitutes ~~have~~the ~~been~~Company’s ~~achieved~~primary ~~had~~business ~~the~~objective, ~~reportable~~supporting ~~segment~~all ~~been~~segments. anCorporate ~~independent,~~expenses ~~stand-alone~~are ~~entity~~not ~~during~~particularly ~~the~~identifiable ~~periods~~to ~~presented~~any one segment.

Financial information relating to reportable segments is as follows:

The Company evaluates the performance of the operating segments based upon gross margin. “Gross Margin” is defined as operating revenues less cost of sales (cost of construction and acquisition, interest, abandonment, impairment and other cost of sales related expenses). Corporate sales, G&A expense and gains or losses are reflected within overall corporate expenses as this constitutes the Company’s primary business objective, supporting all segments. Corporate expenses are not particularly identifiable to any one segment.



	Three months ended March 31,
	Revenues				Gross Margin
(in thousands)	2017		2016		2017		2016
Homebuilding
West	$	76,969	$	56,758	$	14,689	$	10,313
Southeast	17,033		11,467		2,558		1,706
Total homebuilding	94,002		68,225		17,247		12,019
Land development
West	496		—		21		(122		)
Southeast	—		—		—		(339		)
Total land development	496		—		21		(461		)
Total	$	94,498	$	68,225	$	17,268	$	11,558

Financial information relating to reportable segments is as follows (in thousands):

	Three months ended September 30,								Nine months ended September 30,
	2016				2015				2016					2015
	Revenues		Gross Margin		Revenues		Gross Margin		Revenues		Gross Margin			Revenues		Gross Margin
Homebuilding
West	$	79,500	$	15,129	$	51,464	$	10,477	$	204,273	$	38,149		$	120,438	$	22,589
Southeast	10,340		1,535		18,820		2,801		35,207		5,313			43,267		6,372
Total homebuilding	89,840		16,664		70,284		13,278		239,480		43,462			163,705		28,961
Land development
West	3,900		66		1,116		400		5,322		(940		)	3,156		892
Southeast	—		—		—		—		—		(389		)	—		—
Total land development	3,900		66		1,116		400		5,322		(1,329		)	3,156		892
Other (a)	—		—		2,272		314		—		—			5,060		697
Total	$	93,740	$	16,730	$	73,672	$	13,992	$	244,802	$	42,133		$	171,921	$	30,550

(a) Other includes revenues from construction management services the Company acquired as part of the Citizens Acquisition and are not attributable to the homebuilding and land development operations. The business was sold in the fourth quarter of 2015 and the Company no longer provides construction management services to third parties.

Reconciliation of gross margin to net income (loss) is as follows (in thousands):

	Three months ended September 30,					Nine months ended September 30,
	2016			2015		2016			2015
Gross margin	$	16,730		$	13,992	$	42,133		$	30,550
Sales and marketing	4,853			4,692		13,595			13,246
General and administrative	4,592			5,539		19,101			19,311
Goodwill impairment	4,223			—		4,223			—
Income (loss) from operations	3,062			3,761		5,214			(2,007		)
Other income, net	204			45		253			177
Net income (loss) before income taxes	3,266			3,806		5,467			(1,830		)
Provision for income taxes	(124		)	—		(271		)	—
Net income (loss)	$	3,142		$	3,806	$	5,196		$	(1,830	)

~~Total~~Reconciliation ~~assets~~of ~~for~~gross ~~each~~margin ~~reportable~~to ~~and~~net ~~operating~~income ~~segment~~is as ~~of September 30, 2016 and December 31, 2015, are shown in the table below (in thousands)~~follows:

	September 30, 2016			December 31, 2015
	Three months ended March 31,
Homebuilding
(in thousands)	2017			2016
West	$	232,904		$	231,624
Gross margin	$	17,268		$	11,558
Southeast	54,168			49,464
Sales and marketing	5,149			4,076
Total homebuilding	287,072			281,088
General and administrative	8,502			7,275
Land development
Income from operations	3,617			207
West	94,631			79,901
Other income, net	460			28
Southeast	—			—
Net income before income taxes	4,077			235
Total land development	94,631			79,901
Provision for income taxes	(621		)	(5		)
Other (a)	40,489			53,708
Net income	$	3,456		$	230
Total	$	422,192		$	414,697

~~(a) Other~~Total assets ~~primarily~~for ~~include~~each ~~cash~~reportable and ~~cash~~operating ~~equivalents~~segment as of March 31, ~~deposits~~2017 and ~~fixed~~December 31, ~~assets~~2016, ~~which~~ are ~~maintained~~shown ~~centrally~~in ~~and used according to~~ the ~~cash~~table ~~flow~~as ~~requirements of all reportable segments.~~ follows:



(in thousands)	March 31, 2017		December 31, 2016
Homebuilding
West	$	273,893	$	225,770
Southeast	59,659		53,359
Total homebuilding	333,552		279,129
Land development
West	55,826		94,078
Southeast	—		—
Total land development	55,826		94,078
Other ^(a)	52,740		60,899
Total	$	442,118	$	434,106


^(a)	Other assets primarily include cash and cash equivalents, deposits, fixed assets, receivables and deferred tax assets which are maintained centrally and used according to the cash flow requirements of all reportable segments.

11. COMMITMENTS AND CONTINGENCIES

Legal and Regulatory Matters

Lawsuits, claims and proceedings have been or may be instituted or asserted against the Company in the normal course of business, including actions brought on behalf of various classes of claimants. The Company is also subject to local, state and federal laws and regulations related to land development activities, home construction standards, sales practices, employment practices and environmental protection. As a result, the Company is subject to periodic examinations or inquiries by agencies administering these laws and regulations.

The Company records a reserve for potential legal claims and regulatory matters when they are probable of occurring and a potential loss is reasonably estimable. The accrual for these matters is based on facts and circumstances specific to each matter and the Company revises these estimates when necessary.

In view of the inherent difficulty of predicting outcomes of legal claims and related contingencies, the Company generally cannot predict their ultimate resolution, related timing or any eventual loss. If the evaluations indicate loss contingencies that could be material are not probable, but are reasonably possible, disclosure of the nature with an estimate of possible range of losses or a statement that such loss is not reasonably estimable is made. The Company is not involved in any material litigation nor, to the Company's knowledge, is any material litigation threatened against it. As of ~~September~~March 3031, ~~2016~~2017 and December 31, ~~2015~~2016, the Company did not have any accruals for asserted or unasserted matters.

Purchase Commitments

In the ordinary course of business, we may enter into purchase or option contracts to procure lots for development and construction of homes. We are subject to customary obligations associated with entering into contracts for the purchase of land. These contracts to purchase properties typically require a cash deposit and are generally contingent upon satisfaction of certain requirements by the sellers, including obtaining applicable property and development entitlements.

We may also utilize purchase or option contracts with land sellers as a method of acquiring land in staged takedowns to help us manage the financial and market risks associated with land holdings and to reduce the use of funds from corporate financing sources. Purchase or option contracts generally require a non-refundable deposit for the right to acquire lots over a specified period of time at pre-determined prices. We generally have the right to terminate obligations under both purchase or option contracts by forfeiting the cash deposit with no further financial responsibility to the land seller.

Purchase contracts provide the Company with an option to purchase land. The ability to enter into option purchase agreements depends on the availability of land that sellers are willing to sell under option takedown arrangements, the availability of capital from financial intermediaries to finance the development of land, general housing market conditions and local market dynamics.

26As of March 31, 2017, we had outstanding $10.2 million of cash deposits pertaining to purchase or option contracts for 3,743 lots with an aggregate remaining purchase price of approximately $124.4 million. As of December 31, 2016, we had outstanding $9.2 million of cash deposits pertaining to purchase or option contracts for 2,607 lots with an aggregate remaining purchase price of approximately $106.0 million.

On September 9, 2016, we entered into an Option and Development Agreement whereby we assigned the purchase of a land parcel in Hollister, California, located in San Benito County. Under the agreement, we will develop the land into finished lots with an option to purchase 241 finished lots on a monthly takedown basis that expires on April 25, 2020, subject to an extension. Land development costs we incur are reimbursable under a fixed price contract. As part of the agreement, we made a non-refundable deposit of $6.1 million in consideration of the purchase option. Because we do not own the land, costs that we incur up to the fixed price amount, for developing the finished lots will be treated as a receivable for the amounts due. As of September 30, 2016, approximately $2.8 million of reimbursable land development costs under an option and development agreement executed during the third quarter of 2016 was recorded as a receivable.

As of September 30, 2016, we had outstanding $7.7 million of cash deposits pertaining to purchase or option contracts for 1,123 lots with an aggregate remaining purchase price of approximately $49.1 million. As of December 31, 2015, we had outstanding $3.8 million of cash deposits pertaining to purchase or option contracts for 1,127 lots with an aggregate remaining purchase price of approximately $80.1 million.

Endangered Species Act

The U.S. Fish and Wildlife Service (“USFWS”) has listed the pocket gopher as a threatened species under the Federal Endangered Species Act. This species is present on land owned by UCP in Washington State. The Company believes that this project will incur additional costs relating to the listing of the pocket gopher by USFWS, including potential costs related to (i) acquiring offsite mitigation property, (ii) redesigning the project to incorporate onsite mitigation, and (iii) processing the required approvals with USFWS and the city.

During meetings with USFWS ~~earlier in the year~~, the Company discussed acquiring additional land in the same county to satisfy the mitigation requirements through the purchase and dedication of offsite property. Two specific pieces of agricultural property were identified, and the local USFWS office has informally indicated these properties appear to be suitable to satisfy the mitigation requirements. Based on these discussions, the Company is currently under contract to purchase approximately $955,000. However, the Company is unable to completely quantify the costs until the mitigation requirements are established by USFWS, either through its general modeling tool, or the approval of an individual habitat conservation plan for the project. The purchase costs of mitigation property are included in the appropriate project budgets. Accordingly, no liability has been recorded at March 31, 2017. The Company will continue to assess the impact of this regulatory action and will record any future liability as additional information becomes available.

Surety Bonds

The Company obtains surety bonds from third parties in the normal course of business to ensure completion of certain infrastructure improvements at its projects. The performance bonds secure the completion of projects and/or support of obligations to build community improvements, such as roads, sewers, water systems and other utilities. As of ~~September~~March 3031, ~~2016~~2017 and December 31, ~~2015~~2016, the Company had outstanding surety bonds totaling $3923.65 million and $3755.12 million, respectively. In the event that any such surety bond issued by a third party is called because the required improvements are not completed, the Company could be obligated to reimburse the issuer of the bond. Performance bonds do not have stated expiration dates. Rather, the Company is released from a performance bond as the underlying performance is completed. We do not expect that a material amount of any currently outstanding performance bonds will be called.

Letter of Credit

As of March 31, 2017, the Company had $0.6 million outstanding in a letter of credit as part a bond offering at East Garrison, located in Monterey, California. The Company had $0.6 million outstanding in a letter of credit as of December 31, 2016.

Operating Leases

The Company leases some of its offices under non-cancellable operating leases that expire at various dates through 2020 and thereafter. Rent expense for the three and nine months ended September 30, 2016 for office space was approximately $0.3 million and $1.0 million, respectively. For the three and nine months ended September 30, 2015, rent expense for office space was approximately $0.3 million and $0.9 million, respectively.

The Company leases some of its offices under non-cancellable operating leases that expire at various dates through 2020 and thereafter. Rent expense for the three months ended March 31, 2017 and 2016 for office space was approximately $0.3 million and $0.4 million, respectively.

Future minimum payments under all operating leases for the years ending December 31 are as follows (in thousands):

2016	$	256
2017	$	685
2017	1,029
2018	828
2018	937
2019	403
2019	413
2020	275
2020	213
2021	89
Thereafter	18—
Total	$	2,~~866~~280

Contingent Consideration

The change in estimated fair value of the contingent consideration relating to the Citizens Acquisition consisted of the following (in thousands):

	Contingent Consideration
Balance as of December 31, 2014	$	3,525
Change in fair value	(818		)
Balance as of September 30, 2015	$	2,707

	Contingent Consideration
Balance as of December 31, 2015	$	2,707
Change in fair value	(2,400		)
Balance as of September 30, 2016	$	307

The contingent consideration arrangement relating to the Citizens Acquisition requires the Company to pay up to a maximum of $6.0 million of additional consideration based upon the achievement of various pre-tax net income performance milestones (“performance milestones”) by the assets acquired in the Citizens Acquisition over a five-year period that commenced on April 1, 2014. Payout calculations are made based on calendar year performance except for the sixth payout calculation which will be calculated based on the achievement of performance milestones from January 1, 2019 through March 25, 2019. Payouts are made on an annual basis. The potential undiscounted amount of all future payments that the Company could be required to make under the contingent consideration arrangement is between $0 and $6 million. The fair value of the contingent consideration of $0.3 million as of September 30, 2016 was estimated based on applying the weighted probability of achievement of the performance milestones. See Note 8, “Fair Value Disclosures” for a further discussion of the fair value measurement of contingent consideration.

12. INCOME TAXES

~~For~~The ~~the~~effective ~~three and nine months ended September 30, 2016, a provision for income taxes of $124,000 and $271,000, respectively, was recorded. No~~ tax ~~provision~~rate ~~was recorded~~ for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2015. The~~2017 ~~increase~~and in2016 ~~the~~were ~~year~~based ~~over~~on ~~year~~federal statutory income tax ~~provision~~rates, isaffected ~~primarily~~by ~~related~~state toincome ~~Alternative~~taxes, ~~Minimum~~changes ~~Tax~~in asdeferred atax ~~result~~assets, ofchanges ~~the Company’s increase~~ in ~~earnings~~valuation ~~for~~allowances, ~~the three~~ and ~~nine~~certain ~~months~~preferential ~~ended~~treatment ~~September~~of ~~30,~~deductions ~~2016,~~and ascredits ~~compared~~relating to ~~the~~homebuilding ~~same periods in 2015~~activities.

AsThe aCompany ~~result~~continues ofto ~~the~~believe ~~analysis~~that ofit ~~all~~will ~~available~~be ~~evidence~~able ~~as of September 30, 2016 and December 31, 2015, the Company continued~~ to ~~record~~realize ~~a full valuation allowance on~~ its ~~net~~ deferred tax assets~~. If~~, ~~the~~therefore ~~Company’s~~no ~~assumptions~~valuation ~~change~~allowance ~~and~~was ~~the~~recorded ~~Company~~during ~~believes~~the ~~that~~three itmonths ~~will~~ended beMarch ~~able to realize these deferred tax assets~~31, ~~the~~2017. ~~tax~~The ~~benefits~~increase ~~relating~~in ~~to any reversal of~~ the ~~valuation~~year ~~allowance~~over onyear ~~deferred~~income tax ~~assets~~provision ~~will~~is beprimarily ~~recognized~~ as a ~~reduction~~result of ~~future income tax expense. If~~ the ~~assumptions~~Company’s dofull ~~not~~valuation ~~change,~~allowance ~~each~~recorded ~~period~~during the ~~Company~~three ~~could~~months ~~record~~ended anMarch ~~additional~~31, ~~valuation~~2016, ~~allowance~~as oncompared ~~any~~to ~~increases~~the inthree ~~the~~months ~~deferred~~ended ~~tax~~March ~~assets~~31, 2017. See Note 1, “Organization, Basis of Presentation and Summary of Significant Accounting Policies--Income Taxes” for a further discussion of income taxes.

13. SUBSEQUENT EVENT

On April 10, 2017, the Company, Century and Casa Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), entered into the Merger Agreement, pursuant to which the Company will be merged with and into Merger Sub (the “Merger”), with Merger Sub continuing as the surviving entity in the Merger. The Board has unanimously approved and declared advisable the Merger Agreement and the transactions contemplated thereby and resolved to recommend that the stockholders of the Company vote to adopt the Merger Agreement and approve the Merger.

Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each issued and outstanding share of the Company’s Class A common stock (excluding any shares (i) owned by the Company, Century, Merger Sub or any of their respective wholly-owned subsidiaries or (ii) held by any stockholder who properly demands and perfects his, her or its appraisal rights with respect to such shares) will be converted into the right to receive and become exchangeable for (A) $5.32 in cash, without any interest thereon (the “Cash Consideration”) and (B) 0.2309 (the “Stock Exchange Ratio”) of a share of Century Common Stock. No fractional shares of Century Common Stock will be issued in the Merger, and Company stockholders will receive cash in lieu of any fractional shares.

The Merger Agreement provides that, at the Effective Time, each option to purchase shares of the Company’s Class A common stock (a “Company Option”) will be converted into an option (an “Adjusted Option”) to purchase shares of Century Common Stock on the same terms and conditions (including vesting terms, conditions and schedules), with the number of such shares of Century Common Stock equal to the product of (i) the total number of shares of the Company’s Class A common stock underlying such Company Option, multiplied by (ii) the Equity Award Exchange Ratio (as defined in the Merger Agreement and below), and with the exercise price of such Adjusted Option equal to the quotient obtained by dividing (i) the exercise price per share applicable to such Company Option, by (ii) the Equity Award Exchange Ratio. Additionally, at the Effective Time, each restricted stock unit with respect to a share of the Company’s Class A common stock (a “Company Restricted Stock Unit”) will be converted into a restricted stock unit

~~Item~~with 2.respect ~~Management’s~~to ~~Discussion~~a share of Century Common Stock on the same terms and ~~Analysis~~conditions of(including ~~Financial~~vesting ~~Condition~~terms, conditions and ~~Results~~schedules), and relating to a number of ~~Operations~~shares of Century Common Stock equal to the product of (~~“MD&~~i) the number of shares of the Company’s Class A common stock subject to such Company Restricted Stock Unit, multiplied by (ii) the Equity Award Exchange Ratio, with any fractional shares rounded to the nearest whole number of shares of Century Common Stock. As defined in the Merger Agreement, the term “Equity Award Exchange Ratio” shall be equal to the sum of (i) the Stock Exchange Ratio and (ii) the quotient obtained by dividing (x) the Cash Consideration by (y) the average closing sale price of a share of Century Common Stock as reported on the New York Stock Exchange for the five consecutive trading days ending on and including the second complete trading day immediately preceding the closing of the Merger, rounded to the nearest ten-thousandth.

The Merger Agreement contains customary representations and warranties made by each of the Company and Century, and also contains customary pre-closing covenants, including covenants, among others, (i) by the Company to operate its businesses in the ordinary course consistent with past practice and to refrain from taking certain actions without Century’s consent, (ii) by the Company not to solicit, initiate, or knowingly encourage or facilitate and, subject to certain exceptions, not to participate in any discussions or negotiations with, or otherwise knowingly cooperate with, assist, or participate in any effort by, any person (other than Century and Merger Sub) regarding any proposal of an alternative transaction, (iii) by the Company to call and hold a special stockholders meeting and, subject to certain exceptions, require the Board to recommend to the Company’s stockholders that they vote in favor of the adoption of the Merger Agreement and approval of the Merger and (iv) by each of Century, Merger Sub and the Company to use all reasonable efforts to obtain governmental, regulatory and third party approvals.

The Merger Agreement contains certain termination rights for each of the Company and Century, including in the event that (i) the parties mutually agree to termination, (ii) the Merger is not consummated on or before October 15, 2017 (the “Outside Date”), (iii) any law or order permanently prohibits consummation of the Merger, (iv) any condition to the obligation of either party to consummate the Merger becomes incapable of satisfaction before the Outside Date, (v) the requisite approval of the Company’s stockholders is not obtained, (vi) either party is in breach of its respective representations and warranties or covenants under the Merger Agreement such that a closing condition is not satisfied (subject to notice and cure and other customary exceptions), (vii) the Board changes its recommendation to the Company’s stockholders or (viii) the Company enters into an agreement providing for a superior alternative transaction.

The transaction is expected to close by the end of the third quarter of 2017, subject to customary closing conditions, including adoption of the Merger Agreement by our stockholders at a special meeting.

The foregoing description of the Merger Agreement is only a summary, does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, which is filed as an exhibit to our Current Report on Form 8-K filed with the SEC on April 11, 2017.

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We make forward-looking statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations and in other sections of this report that are subject to risks, uncertainties and assumptions. All statements other than statements of historical fact included in this report are forward-looking statements. You can identify forward-looking statements by the fact that they do not relate strictly to historical facts. These statements may include words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “project,” “goal,” “intend” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements may include projections of our future financial or operating performance, our anticipated growth strategies, anticipated trends in our business and other future events or circumstances. These statements are based on our current expectations and projections about future events and may prove to be inaccurate.

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may prove to be incorrect or imprecise and may prove to be inaccurate. We do not guarantee that the transactions and events described in any forward-looking statements will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:


•	the possibility that the proposed merger transaction with Century will not close, including by the failure to obtain stockholder approvals or the failure to satisfy other closing conditions under the Merger Agreement or by the termination of the Merger Agreement;


•	failure to plan and manage the proposed merger effectively and efficiently;


•	the possibility that the anticipated benefits from the merger may not be realized or may take longer to realize than expected;


•	unexpected costs or unexpected liabilities that may arise from the transactions contemplated by the Merger Agreement, whether or not completed;


•	the outcome of any legal proceedings that may be instituted against us or Century regarding the merger;


•	economic changes, either nationally or in the markets in which we operate, including declines in employment, volatility of mortgage interest rates, declines in consumer sentiment and an increase in inflation;


•	downturns in the homebuilding industry, either nationally or in the markets in which we operate;


•	continued volatility and uncertainty in the credit markets and broader financial markets;


•	the operating performance of our business;


•	changes in our business and investment strategy;


•	availability of land to acquire and our ability to acquire land on favorable terms or at all;


•	availability, terms and deployment of capital;


•	disruptions in the availability of mortgage financing or increases in the number of foreclosures in our markets;


•	shortages of or increased prices for labor, land or raw materials used in housing construction;


•	delays or restrictions in land development or home construction, or reduced consumer demand resulting from adverse weather and geological conditions or other events outside our control;


•	the cost and availability of insurance and surety bonds;


•	changes in, or the failure or inability to comply with, governmental laws and regulations;


•	the timing of receipt of regulatory approvals and the opening of communities;


•	the degree and nature of our competition;


•	our leverage and debt service obligations;


•	our future operating expenses, which may increase disproportionately to our revenue;


•	our ability to achieve operational efficiencies with future revenue growth;

• our relationship, and actual and potential conflicts of interest, with PICO, which owns a 56.97% economic interest in our primary operating subsidiary, UCP, LLC, as of ~~September~~March 3031, ~~2016~~2017 and has commensurate voting power in UCP, Inc.; and


•	availability of, and our ability to retain, qualified personnel.

For a further discussion of these and other factors, see the “Risk Factors” disclosed in our Annual Report on Form 10-K ~~for~~that was filed with the ~~year~~SEC ~~ended~~on ~~December 31~~March 3, ~~2015~~2017 and our Annual Report on Form 10-K/A that was filed with the SEC on April 28, 2017. In light of these risks and uncertainties, the forward-looking statements discussed in this report might not occur. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance, and our actual results could differ materially from those expressed in any forward-looking statement. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by law.

3031

OVERVIEW

Recent Developments

On April 10, 2017, we entered into the Merger Agreement pursuant to which we have agreed to merge with Century. In the merger, each outstanding share of Class A common stock will be converted into the right to receive $5.32 in cash and 0.2309 of a newly issued share of Century Common Stock. The transaction is expected to close by the end of the third quarter of 2017, subject to customary closing conditions, including the adoption of the Merger Agreement by our stockholders at a special meeting.

Select Operating Metrics

For the three months ended ~~September~~March 3031, ~~2016~~2017, as compared to the same period during ~~2015~~2016:

•Consolidated net income ~~decreased~~increased to $3.15 million as compared to $30.82 million;

•Basic earnings per share of Class A common stock (“EPS”) for the quarter was $0.1614 as compared to $0.2101;

•Net new home orders increased 1420.40% to ~~247~~270;

•Backlog value increased 3029.16% to $~~157~~176.26 million;

•Home deliveries ~~decreased~~increased 135.53% to ~~199~~226;

•Average sales price (“ASP”) of a home closed increased 291.67% to $~~451~~416,000 per home;

•Homebuilding revenue increased by $1925.68 million, or 2737.8%, to $8994.80 million;

•Consolidated gross margin ~~decreased~~increased by ~~120~~140 basis points to 1718.83%;

•Homebuilding gross margin ~~decreased~~increased by 4070 basis points to 18.53%;

•As a percentage of total revenue, ~~Sales~~sales and ~~Marketing~~marketing expenses decreased to 5.24% from 6.40%; and

• As a percentage of total revenue, general and administrative (“G&A”) expenses decreased to 4.9.0% from 710.57%.

~~For~~During the ~~nine~~three months ended ~~September~~March 3031, 2017, our homebuilding revenues increased by $25.8 million, or 37.8%, to $94.0 million, as compared to $68.2 million for the three months ended March 31, 2016. The growth in homebuilding revenue was primarily due to the 35.3% increase in homes delivered and the 1.7% increase in ASP of homes delivered during the three months ended March 31, 2017. Homes delivered during the three months ended March 31, 2017 increased to 226 homes delivered as compared to 167 homes delivered during the ~~same~~three ~~period~~months ended March 31, 2016. The ASP of homes delivered increased to $416,000 as compared to $409,000 during ~~2015:~~the three months ended March 31, 2016.

~~•Consolidated~~As ~~net~~a ~~income~~result ~~increased~~of strong market demand, we have been able to $5reduce our use of sales incentives. For the three months ended March 31, 2017, sales incentives accounted for 2.2% ~~million~~of asrevenues ~~compared~~down from 2.5% for the three months ended March 31, 2016. The most significant decline in the use of sales incentives was in our North Carolina, Central Valley, the Pacific Northwest and Tennessee divisions partially offset by increases in our Southern California and South Carolina divisions. The Bay Area division remained relatively flat, with only a small decrease. Sales incentives are a reduction to revenue as we record sales incentives as a ~~net~~reduction ~~loss~~in the sales price of ~~$1.8~~a ~~million;~~home.

~~•Basic~~Our ~~EPS~~land ~~for~~development ~~the~~segment ~~nine~~revenues, ~~months~~given ~~was~~our opportunistic strategy towards this business segment, vary from quarter to quarter. Land development segment revenue increased to $0.265 million during the three months ended March 31, 2017, as compared to ~~negative~~no $0land development revenue during the three months ended March 31, 2016 as a result of a single lot sale and the recognition of deferred revenue associated with a previous land sale.~~11;~~ We regularly analyze the highest and best use of each of our land holdings. Through the first quarter of 2017, we determined that there were no opportunities for additional land sales at margins that justified foregoing the margins available from building homes through our homebuilding operations, Benchmark Communities.

~~•Net~~Consolidated ~~new~~net ~~home~~income ~~orders~~was ~~increased~~$3.5 million for the three months ended March 31, 2017, as compared to $0.2 million for the three months ended March 31, 2016. The increase of $3.7%2 million in net income was primarily due to ~~701;~~an increase in home deliveries during

•Home deliveries increased 17.8% to 563;

•Homebuilding revenue increased by $75.8 million, or 46.3%, to $239.5 million;

•Consolidated gross margin decreased by 60 basis points to 17.2%;

•Homebuilding gross margin increased by 40 basis points to 18.1%;

•As a percentage of total revenue, Sales and Marketing expenses decreased to 5.6% from 7.7%; and

•As a percentage of total revenue, G&A expenses decreased to 7.8% from 11.2%.

As of September 30, 2016, we recorded a $4.2 million impairment to goodwill, partially offset by a $2.4 million reduction in our contingent consideration obligation.

During the three months ended September 30, 2016, our homebuilding revenues increased by $19.6 million, or 27.8%, to $89.8 million, as compared to $70.3 million for the three months ended September 30, 2015. The growth in homebuilding revenue was due to the increase in our average selling price (“ASP”) of homes delivered during the three months ended September 30, 2016 to $451,000 as compared to $348,000 during the three months ended September 30, 2015.

As a result of strong market demand, we have been able to reduce our use of sales incentives. For the three months ended September 30, 2016, sales incentives accounted for 1.6% of revenues down from 2.4% for the three months ended September 30, 2015. The most significant decline in the use of sales incentives was in our Central Valley, North Carolina, the Pacific Northwest and Tennessee divisions partially offset by increases in our Southern California, and South Carolina divisions. The Bay Area division remained relatively flat, with only a small increase. Sales incentives are a reduction to revenue as we record sales incentives as a reduction in the sales price of a home.

During the nine months ended September 30, 2016, our homebuilding revenues increased by $75.8 million, or 46.3%, to $239.5 million, as compared to $163.7 million for the nine months ended September 30, 2015. The growth in homebuilding revenue was primarily due to the 17.8% increase in homes delivered and the 24.3% increase in ASP of homes delivered during the nine months ended September 30, 2016 to $425,000 as compared to $342,000 during the nine months ended September 30, 2015.

Our land development segment revenues, given our opportunistic strategy towards this business segment, increased by $2.8 million, or 249.5%, to $3.9 million during the three months ended September 30, 2016, as compared to $1.1 million during the three months ended September 30, 2015.

Consolidated net income was $3.1 million for the three months ended September 30, 2016, as compared to $3.8 million for the three months ended September 30, 2015. For the nine months ended September 30, 2016, consolidated net income was $5.2 million, as compared to a net loss of $1.8 million for the nine months ended September 30, 2015.

As of September 30, 2016, we had $27.6 million of cash and cash equivalents, excluding restricted cash, on hand. We had outstanding debt of $157.8 million and equity of $217.5 million. As a result, our Debt-to-Capital and Net Debt-to-Capital was 42.0% and 40.0%, respectively. Our Net Debt-to-Capital is a non-GAAP financial measure. See “Liquidity and Capital Resources-Debt-to-Capital and Net Debt-to-Capital Ratios” below for a reconciliation of this non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP.

Backlog consists of homes under contract that have not yet been delivered. Our backlog value as of September 30, 2016 was $157.2 million, representing approximately a $36.3 million increase, or 30.1%, as compared to our September 30, 2015 backlog of $120.8 million. In units, our backlog as of September 30, 2016 was 387 homes, representing an increase of 34.4%, as compared to 288 homes in backlog as of September 30, 2015.

As of September 30, 2016, we owned or controlled a total of 5,484 residential lots, representing a 7.0 year supply based on our delivery of 786 homes for the twelve months ended September 30, 2016.

As of September 30, 2016, we had 559 homes in inventory, which included 421 homes under construction and 138 completed homes as shown in the charts below:

the three months ended March 31, 2017 that drove homebuilding revenue growth to $94.0 million from $68.2 million for the three months ended March 31, 2016.

Furthermore, our consolidated net income during the three months ended March 31, 2017 was positively impacted by our ability to increase revenue while maintaining sales and marketing and general and administrative (“SG&A”) expenses, which improved by 13.3%, to 14.4% of total revenue during the three months ended March 31, 2017 from 16.6% during the three months ended March 31, 2016. The combination of increased unit deliveries and revenue during the three months ended March 31, 2017 with a focus on managing our SG&A expenses reduced our operating expenses as a percentage of revenue.

We continue to focus our efforts on allocating capital in order to enhance our return metrics. Each new opportunity is evaluated on its ability to meet our risk-adjusted return thresholds. We require higher returns when we take additional risk by entitling and developing land, while we will accept slightly lower returns when we are purchasing finished lots on an option basis. Our focus is on return metrics including internal rate of return, return on assets, return on equity and return on invested capital. Once underway, our focus is on effectively managing our existing communities, inventory and absorption pace in order to seek improved gross margins. Our approach is proactive and focused on identifying operational efficiencies across all of our operations, including our corporate office.

Backlog consists of homes under contract that have not yet been delivered. Our backlog value as of March 31, 2017 was $176.6 million, representing approximately a $40.4 million increase, or 29.6%, as compared to our March 31, 2016 backlog of $136.2 million. The increase in backlog value was primarily due to strong new orders growth for the three months ended March 31, 2017. The number of homes in backlog increased by 99 homes to 406 homes in backlog, representing an increase of 32.2%, as of March 31, 2017 as compared to 307 homes in backlog as of March 31, 2016. The ASP of each home in backlog decreased by 2.0% to $435,000 as of March 31, 2017 from $444,000 as of March 31, 2016 as a result of product and geographic mix.

As of March 31, 2017, we had $34.3 million of cash and cash equivalents, excluding restricted cash, on hand. We had outstanding debt of $161.6 million and equity of $228.5 million. As a result, our Debt-to-Capital and Net Debt-to-Capital was 41.4% and 38.4%, respectively. Our Net Debt-to-Capital is a non-GAAP financial measure. See “Liquidity and Capital Resources-Debt-to-Capital and Net Debt-to-Capital Ratios” below for a reconciliation of this non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP.

We continue to focus on finding the proper balance between maintaining adequate land positions to provide for continued growth and prudently managing our balance sheet. As such, land investment opportunities that met our underwriting criteria were such that our total lots owned and controlled increased by 1,411 lots. As of March 31, 2017, we owned or controlled a total of 8,049 residential lots, representing a 9.2 year supply based on our delivery of 879 homes for the twelve months ended March 31, 2017.

As of March 31, 2017, we had 560 homes in inventory. Excluding model homes, we had 411 homes under construction and 83 completed homes as shown in the charts below:

Our Business Environment and Current Outlook

During the three ~~and nine~~ months ended ~~September~~March 3031, ~~2016~~2017, the overall U.S. housing market continued to show signs of improvement, driven by factors such as continued supply and demand imbalance, low mortgage rates, ~~and~~ employment growth and rising consumer confidence. Individual markets continue to experience varying results, as local home inventories, affordability and employment factors strongly influence local markets.

Homebuilding and land development are local businesses. As a result, we expect local market conditions will affect our community count, revenue and operating performance. Local market trends are the principal factors that impact our revenue and our revenue-related expenses. For example, when these trends are favorable, we expect our revenues from homebuilding and land development, as well as the expenses that vary with revenue, to generally increase; conversely, when these trends are negative, we expect our revenue and expenses that vary with revenue to generally decline, although in each case the impact may not be immediate or directly proportional. When trends are favorable, we expect to increase our community count by opening additional communities and expanding existing communities; conversely, when these trends are negative, we expect to reduce or maintain our community count or decrease the pace at which we open additional communities and expand existing communities.

Our operations for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2016~~2017 reflect our continued focus on a number of initiatives, including growing our homebuilding operations and revenues (by seeking increased home sales at our existing communities), improving our gross margin percentage, improving our operating efficiency (by seeking to reduce non-revenue-related expenses as a percentage of revenue), and managing our balance sheet (by maintaining appropriate cash balances, real estate inventories and leverage).

We believe that our land position in markets where the approval process for land development and home construction is stringent and time consuming gives us a competitive advantage. We believe that by serving diverse market segments, including first-time, move-up, empty-nester, active-adult, and second-home buyers, mitigates the risk associated with any one market segment. We also believe that we operate in geographic markets that currently have strong housing fundamentals. These markets include the San Francisco Bay area, ~~the~~ San Jose and the South Bay ~~areas~~, Monterey, greater Los Angeles and the Central Valley areas of California, ~~the~~ Seattle, ~~area of~~ Washington, Charlotte, North Carolina, Myrtle Beach, South Carolina and Nashville, Tennessee.

During the remainder of ~~2016~~2017, we intend to seek revenue growth and increased productivity from our homebuilding operations in both our West and Southeast operating segments, with significant focus on our Southeast operating divisions as well as our Pacific Northwest division as we work to fully leverage our operating expense investment. We also intend to continue our strategy of selectively buying and selling land when we believe that it is opportunistic to do so. We also intend to seek additional regional and corporate-level operating efficiencies. Additionally, we intend to maintain appropriate cash balances and liquidity in order to meet our obligations and provide growth capital tofor our operations.

3334

RESULTS OF OPERATIONS

Consolidated Financial Data - ~~Three~~For ~~and~~the ~~Nine~~Three Months Ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016

	Three months ended September 30,									Nine months ended September 30,
	Three months ended March 31,
	2016			2015			Change			2016			2015			Change
(In thousands)	2017			2016			Change
	($ in thousands)									($ in thousands)
Revenue:
Revenue:
Homebuilding	$	94,002		$	68,225		$	25,777
Homebuilding	$	89,840		$	70,284		$	19,556		$	239,480		$	163,705		$	75,775
Land development	496			—			496
Land development	3,900			1,116			2,784			5,322			3,156			2,166
Total revenue	94,498			68,225			26,273
Other	—			2,272			(2,272		)	—			5,060			(5,060		)
Cost of sales:
Total revenue	93,740			73,672			20,068			244,802			171,921			72,881
Homebuilding	76,653			56,206			20,447
Cost of Sales:
Land development	475			461			14
Homebuilding	72,984			57,006			15,978			195,561			134,744			60,817
Impairment on real estate	102			—			102
Land development	3,834			716			3,118			4,519			2,264			2,255
Gross margin	17,268			11,558			5,710
Other	—			1,958			(1,958		)	—			4,363			(4,363		)
Expenses:
Impairment on real estate	192			—			192			2,589			—			2,589
Sales and marketing	5,149			4,076			1,073
Gross Margin	16,730			13,992			2,738			42,133			30,550			11,583
General and administrative	8,502			7,275			1,227
Expenses:
Total expenses	13,651			11,351			2,300
Sales and marketing	4,853			4,692			161			13,595			13,246			349
Income from operations	3,617			207			3,410
General and administrative	4,592			5,539			(947		)	19,101			19,311			(210		)
Other income	460			28			432
Goodwill impairment	4,223			—			4,223			4,223			—			4,223
Net income before tax	$	4,077		$	235		$	3,842
Total expenses	13,668			10,231			3,437			36,919			32,557			4,362
Provision for income taxes	(621		)	(5		)	(616		)
Income (loss) from operations	3,062			3,761			(699		)	5,214			(2,007		)	7,221
Net income	$	3,456		$	230		$	3,226
Other income	204			45			159			253			177			76
Net income (loss) before tax	$	3,266		$	3,806		$	(540	)	$	5,467		$	(1,830	)	$	7,297
Provision for income taxes	(124		)	—			(124		)	(271		)	—			(271		)
Net income (loss)	$	3,142		$	3,806		$	(664	)	$	5,196		$	(1,830	)	$	7,026

Non-GAAP Financial Measures

In addition to ~~the~~ results reported in accordance with GAAP, we have provided information in this quarterly report derived from our unaudited condensed consolidated financial statements ~~but~~ not prepared in accordance with GAAP. These are considered non-GAAP financial measures inand ~~which~~should webe ~~have~~construed ~~identified~~as ~~and~~supplemental ~~reconciled~~information ~~the~~along ~~information~~with toour ~~the~~financial ~~most~~statements ~~directly~~prepared ~~comparable~~in ~~GAAP~~accordance ~~financial~~with ~~measure~~GAAP. Specifically, we refer to the following non-GAAP financial measures in various sections of this report:

•Adjusted gross margin; and

•Net debt-to-capital ratio

~~Reasons~~Our reasons for the use of non-GAAP financial measures and ~~the~~ reconciliations to ~~their~~the most directly comparable GAAP financial ~~measures~~measure calculated and presented in accordance with GAAP are included below in ~~the~~this ~~relevant~~Management’s ~~sections~~Discussion ~~within~~and ~~the~~Analysis ~~MD&A~~of Financial Condition and Results of Operations.

Select Operating Metrics - Three and Nine Months Ended September 30, 2016 and 2015

Net New Home Orders and Cancellation Rate

(1) “Net new home orders” refers to new home sales contracts reduced by the number of sales contracts canceled during the relevant period. (2) “Cancellation rate” refers to sales contracts canceled divided by sales contracts executed during the relevant period.

For the three and nine months ended September 30, 2016, our net new home orders increased by 31 and 25 homes, or 14.4% and 3.7%, respectively, as compared to the same periods in 2015. Net new home orders for the three and nine months ended September 30, 2016 in our West operating segment grew 19.3% and 16.7%, respectively, as compared to the same periods in 2015. Our West operating segment continues to experience strong demand that is exceeding building capacity in many communities. As a result, we continue to limit sales to approximately a six month supply of backlog. In our West operating segment, net new orders grew most dramatically in our Bay Area division for the three months ended September 30, 2016. This dramatic growth in our Bay Area division was a result of strong demand coupled with an increase in active selling communities in our Bay Area division to seven, as of September 30, 2016, from six active selling communities as of September 30, 2015. Net new home orders in our West operating segment for the nine months ended September 30, 2016 increased in our Central Valley, Bay Area and Pacific Northwest divisions.

Net new home orders in our Southeast operating segment grew 6.2% during the three months ended September 30, 2016 and declined 19.1% during the nine months ended September 30, 2016, as compared to the same periods in 2015. The growth in the Southeast operating segment for the three month period was driven by 240.0% growth in our Nashville division on a year-over-year basis. For the nine months ended September 30, 2016, our Southeast operating segment experienced a decline in net new home orders across all divisions. During the nine months ended September 30, 2016, new order activity in our Southeast operating segment has been adversely impacted by weather that has delayed community openings and the abandonment of a number of land positions, earlier in the year, that did not meet our underwriting criteria.

~~Active~~Select ~~Selling~~Operating ~~Communities~~Metrics - For the Three Months Ended March 31, 2017 and ~~Absorption~~2016

~~(1)~~Net ~~“Average~~New ~~Active~~Home ~~Selling~~Orders ~~Communities~~and ~~during~~Cancellation the period” refers to the average number of open selling communities at the end of each month during the period. (2) “Active Selling Communities” consists of those communities where we have more than 15 or more homes remaining to deliver. (3) “Absorption per Community” refers to the number of net new home orders sold in each active selling community for the period.Rate

~~The~~(1) ~~number~~“Net ofnew ~~average~~home ~~active~~orders” ~~selling~~refers ~~communities for both the three and nine months ended September 30, 2016 increased by one, as compared~~ to the same periods in 2015. During the three months ended September 30, 2016, we closed-out five communities, three in our Central Valley division and two in our Tennessee division. During the three months ended September 30, 2016 we opened three new ~~communities,~~home ~~two~~sales incontracts ~~our~~reduced ~~Central~~by ~~Valley division and one in our Tennessee division. In addition to~~ the ~~communities~~number ~~closed-out~~of ~~and~~sales ~~opened~~contracts canceled during the ~~three~~relevant ~~months ended September 30, 2016, we closed-out an additional four communities~~ period.(~~one in each of our SF Bay, Central Valley, Washington and South Carolina divisions~~2) ~~and~~“Cancellation ~~opened~~rate” ~~five~~refers ~~new~~to ~~communities~~sales ~~(two~~contracts incanceled ~~our~~divided SFby ~~Bay~~sales ~~division,~~contracts ~~and~~executed ~~one~~during ~~in each of our Central Valley, North Carolina and South Carolina divisions) for~~ the ~~nine~~relevant ~~months ended September 30, 2016~~period.

~~Absorption~~Net ~~per~~new ~~community~~home ~~per~~orders ~~month~~during the three months ended March 31, 2017 increased by ~~0.2~~45 homes, toor 220.80%, ~~homes~~as ~~per~~compared ~~community~~to ~~per~~the ~~month~~three ~~and~~months ~~remained~~ended ~~level~~March at31, 22016.8 ~~homes~~In ~~per~~our ~~community~~West ~~per~~operating ~~month~~segment, ~~for~~net ~~the~~new ~~three~~home ~~and~~orders ~~nine~~increased 25.0% during the three months ended ~~September~~March 3031, ~~2016~~2017, ~~respectively,~~ as compared to the ~~same~~three ~~periods~~months inended ~~2015. This~~March ~~was~~31, 2016, primarily ~~due~~in toour Bay Area division. The growth in our ~~absorption~~Bay Area division was a result of strong demand coupled with an increase in active selling communities in our ~~West~~Bay ~~operating~~Area ~~segment~~division to ~~3.0~~nine ~~homes~~from ~~per~~seven ~~community~~active ~~per~~selling ~~month~~communities during the three months ended ~~September~~March 3031, ~~2016~~2017, as compared to 2the same period in 2016.4 ~~homes~~Net ~~per~~new ~~community~~home ~~per~~orders ~~month~~in our West operating segment also increased in our Southern California division during the ~~same~~three ~~period~~months ended March 31, 2017 with the number of active selling communities remaining constant. Our West operating segment continues to experience strong demand that is exceeding building capacity in ~~2015~~many communities. As a result, we continue to limit sales to approximately a six-month supply of backlog.

Our Southeast operating segment experienced an increase of 2.0% during the three months ended March 31, 2017 in net new home orders primarily in our North Carolina and South Carolina divisions, slightly offset with a decrease in net new home orders in our Tennessee division as compared to the three months ended March 31, 2016. Currently, we have no active communities open for sale in Tennessee; we are actively developing land so that we can open new communities for sale late in 2017 and in 2018. We intend to seek additional land purchases in our Southeast operating segment in 2017 to provide adequate land to increase new order activity.

~~Backlog~~Active -Selling AsCommunities ofand ~~September 30, 2016~~ Absorption

~~Our~~(1) ~~backlog~~“Average ~~value~~Active ofSelling ~~$157.2~~Communities” ~~million~~refers asto ofthe ~~September 30,~~average ~~2016~~number ~~represented an increase~~ of ~~approximately~~open ~~$36.3~~selling ~~million,~~communities orat ~~30.1%,~~the asend ~~compared to our backlog value~~ of ~~$120.8~~each ~~million~~month asduring ofthe ~~September 30, 2015~~period. ~~The~~(2) ~~increase~~“Active ~~was~~Selling ~~due~~Communities” toconsists ~~an increase~~ of 99those ~~unit~~communities ~~homes~~where inwe ~~backlog,~~have ~~partially~~more ~~offset~~than by15 aor ~~decrease~~more ~~of $14,000 in the ASP of~~ homes inremaining ~~backlog~~ to ~~$406,000~~deliver.(3) as“Absorption ofper ~~September 30,~~Community” ~~2016,~~refers ~~as compared~~ to ~~September 30, 2015. The increase in~~ the number of ~~homes~~net innew ~~backlog~~home ~~was~~orders asold ~~result~~per ofmonth ~~an increase of 66 homes~~ in ~~backlog~~each inactive ~~our~~selling ~~West~~community ~~operating~~for segment and an increase of 33 homes in backlog in our Southeast operating segment as of September 30, 2016, as compared to September 30, 2015. The mix of homes in backlog between our two operating segments remained fairly constant as of September 30, 2016 and September 30, 2015 (as shown in the ~~charts below)~~period.

~~(1)~~The ~~“Backlog”~~number ~~refers~~of toaverage ~~homes~~active ~~under~~selling ~~sales~~communities ~~contracts~~for ~~that~~the ~~have~~three ~~not~~months ~~yet~~ended ~~closed~~March at31, ~~the~~2017 ~~end~~decreased ofby ~~the~~one, ~~relevant~~as ~~period.~~compared ~~Sales contracts relating~~ to ~~homes in backlog may be canceled by~~ the ~~purchaser~~three ~~for~~months aended ~~number~~March ~~of reasons~~31, ~~such~~2016. asDuring the ~~prospective~~three ~~purchaser's~~months ~~inability~~ended toMarch ~~obtain~~31, ~~mortgage~~2017, ~~financing.~~we ~~Upon~~closed-out atwo ~~cancellation~~communities, ~~the~~one ~~escrow~~in ~~deposit~~each isof ~~returned~~our toSouth ~~the~~Carolina ~~prospective~~and ~~purchaser~~Tennessee ~~(other~~divisions. ~~than~~There ~~with~~were ~~respect~~no tonew ~~certain~~community ~~design-related~~openings ~~deposits,~~during ~~which~~the wethree ~~retain).~~months ~~Accordingly,~~ended ~~backlog~~March ~~may~~31, ~~not be indicative of our future revenue~~2017.

For the three months ended March 31, 2017, we had 18 average active selling communities located in our West operating segment and nine in our Southeast operating segment. For the three months ended March 31, 2016, we had 19 average active selling communities located in our West operating segment and nine in our Southeast operating segment.

Absorption per community per month during the three months ended March 31, 2017 increased by 0.6 homes per community per month as compared to the three months ended March 31, 2016. This was primarily due to growth in absorption to 4.1 homes per community per month in our West operating segment and 1.9 homes per community per month in our Southeast operating segment during the three months ended March 31, 2017 as compared to 3.1 homes per community per month in our West operating segment and 1.8 homes per community per month in our Southeast operating segment during the three months ended March 31, 2016.

~~Owned~~Backlog ~~and Controlled Lots~~ - As of ~~September~~March ~~30, 2016 and December~~ 31, ~~2015~~2017

AsOur ofbacklog ~~September 30,~~value ~~2016~~as ~~and~~of ~~December~~March 31, ~~2015,~~2017 werepresented ~~owned~~an increase of approximately $40.4 million, or ~~controlled~~29.6%, ~~pursuant~~as compared to ~~purchase~~our orbacklog ~~option~~value ~~contracts~~as of March 31, an2016. ~~aggregate~~The increase as of 5March 31,~~484~~ ~~and~~2017 5was due to an increase of 99 unit homes in backlog,~~878~~ ~~lots~~partially offset by a decrease of $9,000 ~~respectively~~in the ASP of homes in backlog as of March 31, 2017 as ~~set~~compared ~~forth~~to March 31, 2016. The increase in the ~~graphs~~number ~~below:~~of homes in backlog was a result of an increase of 70 homes in backlog in our West operating segment and an increase of 29 homes in backlog in our Southeast operating segment as of March 31, 2017 as compared to March 31, 2016.

~~(1)~~The ~~Controlled~~mix ~~lots~~of ~~are~~homes ~~those~~in ~~subject~~backlog between our two operating segments changed as of March 31, 2017 as compared to aMarch 31, ~~purchase~~2016 or(as ~~option~~shown ~~contract.~~in the charts below):

AsPercentage of ~~September 30,~~Homes ~~2016,~~in ~~our~~Backlog ~~total lots owned decreased~~ by 390 lots and total lots controlled decreased by four lots since December 31, 2015. This reflects our continued emphasis during 2016 on managing our existing communities across our geographies and seeking regional and corporate-level operating efficiencies, as opposed to increasing our inventory of owned and controlled lots.Segment

~~Revenue~~(1) “Backlog” refers to homes under sales contracts that have not yet closed at the end of the relevant period. Sales contracts relating to homes in backlog may be canceled by the purchaser for a number of reasons, such as the prospective purchaser's inability to obtain mortgage financing. Upon a cancellation, the escrow deposit is returned to the prospective purchaser (other than with respect to certain design-related deposits, which we retain). Accordingly, backlog may not be indicative of our future revenue.

For the three months ended September 30, 2016, total revenue increased by $20.1 million, or 27.2%, as compared to the same period in 2015. The increase in total revenue was the result of an increase of $20.5 million in the ASP of homes delivered during the 2016 period and an increase in land development revenue of $2.8 million, which were partially offset by a decrease of three homes in the number of home deliveries, as compared to the same period in 2015.

For the nine months ended September 30, 2016, total revenue increased by $72.9 million, or 42.4%, as compared to the same period in 2015. The increase in total revenue was the result of an increase of 85 homes in home deliveries, an increase of $46.7 million in the ASP of homes delivered during the 2016 period, coupled with an increase in land development revenue, as compared to the same period in 2015.

~~For~~Owned ~~the~~and ~~three~~Controlled ~~months~~Lots ~~ended~~- ~~September~~As ~~30, 2016, homebuilding revenue increased by $19.6 million, or 27.8%, as compared to the same period in 2015. The increase was as a result~~ of aMarch ~~29.6% increase in the ASP of homes delivered~~31, to2017 $451,000, during the 2016 period, as compared to the same period in 2015. This revenue increase was attributable to approximately $20.5 million of additional revenue related to an increase in ASP partially offset by approximately $1.0 million related to a 1.5% decrease in home deliveries in the 2016 period as compared to the 2015 period. The increase in our ASP during the three months ended September 30, 2016 was attributable to an increase in ASP across most of the divisions in our West and ~~Southeast operating segments~~December 31, ~~as compared to the same period in 2015.~~2016

~~For~~We ~~the~~owned ~~nine months ended September 30, 2016, homebuilding revenue increased by $75.8 million,~~ or ~~46.3%~~controlled, aspursuant ~~compared~~ to ~~the~~purchase ~~same~~or ~~period~~option ~~in 2015. The increase was primarily the result of a 17.8% increase in home deliveries and a 24.3% increase in the ASP of homes delivered to $425~~contracts,~~000~~ ~~during~~ the ~~2016 period, as compared to the same period in 2015. Of this revenue increase, $46.7 million was related to the increase in ASP and $29.1 million was related to the increase in the~~ number of ~~homes~~lots ~~delivered. The~~set ~~increase~~forth in the ~~ASP~~graphs during the 2016 period was primarily the result of an increase in the number of homes delivered in our West operating segment, which accounted for 73.4% of deliveries, or a 45.9% increase, during the nine months ended September 30, 2015, as compared to the same period in 2015.below:

~~For~~As ~~the~~of ~~three months ended September 30~~March 31, ~~2016~~2017, ~~revenue~~our ~~from~~total ~~land~~lots ~~development~~owned and controlled increased by ~~$2.8 million~~1,411 orlots ~~249.5%~~since December 31, as2016. ~~compared~~Total toowned ~~same~~increased ~~period~~by in275 ~~2015. The~~lots ~~$3.9~~and ~~million~~total incontrolled ~~land~~increased ~~development~~by ~~revenue~~1,136 ~~during~~lots. ~~the~~On ~~third~~a ~~quarter~~segment ofbasis, ~~2016~~our ~~was~~West ~~related~~operating tosegment increased the ~~sale~~total ofowned 65and ~~Sundance~~controlled lots, asby ~~previously~~95 ~~impaired~~lots and ~~disclosed. For~~our ~~nine~~Southeast ~~months~~operating ~~ended~~segments ~~September~~increased ~~30,~~the ~~2016,~~total ~~land~~owned ~~development~~and ~~revenue~~controlled ~~increased~~lots by ~~$2.2 million~~1,316 ~~or 68~~lots.~~6%,~~ ~~as compared to same period in 2015.~~

~~Other~~Of ~~revenue for~~ the ~~three~~8,049 owned and ~~nine~~controlled ~~months~~lots ~~ended~~as ~~September~~of 30March 31, ~~2016~~2017, ~~was~~1,040 ~~zero~~lots were finished, 766 lots were under development, 3,098 lots were approved with primary entitlements and ~~approximately~~3,073 $lots were unentitled, of which 2.3,948 ~~million~~of the unentitled lots are under our control while we process entitlements, and ~~$5.1~~72 ~~million~~lots under contract for sale. This increase in the number of controlled lots reflects our strategy of seeking to increase deliveries in our three Southeast divisions and ~~nine~~the Pacific Northwest division in order to more fully leverage our operating expense investment. The increase in owned lots during three months ended ~~September~~March 3031, ~~2015,~~2017 ~~respectively. Other~~reflects ~~revenue~~our ~~during~~focus ~~2015~~on ~~was~~managing ~~related~~our toexisting ~~construction~~inventory ~~management~~across ~~services~~our ~~provided~~geographies towith ~~third-party~~a ~~property~~focus ~~owners~~on ~~primarily~~improving ~~under~~our ~~“cost~~return ~~plus~~metrics. ~~fee”~~On ~~contracts~~a segmented basis, ~~which~~our ~~was~~West ~~conducted~~operating insegment decreased the number of owned lots by 153 and our Southeast ~~operations~~operating segment increased the number of owned lots by 428. We ~~sold~~Our ~~this~~West ~~business~~operating insegment increased the ~~fourth~~number ~~quarter~~ of ~~2015,~~controlled lots by 248 and weour noSoutheast ~~longer~~operating ~~provide~~segments ~~construction~~increased ~~management~~the ~~services~~number toof ~~third~~controlled ~~parties~~lots by 888.

As of December 31, 2016, our total lots owned and controlled was 6,638 lots, of which 4,031 were owned and 2,607 were controlled. On a segment basis, our West operating segment consisted of 4,075 lots and our Southeast operating segment consisted of 2,563 lots.

Of the 6,638 owned and controlled lots as of December 31, 2016, 1,048 lots were finished, 1,083 lots were under development, 3,747 lots were approved with primary entitlements and 760 lots were unentitled, of which 635 of the unentitled lots are under our control while we process entitlements. Our number of controlled lots reflects our strategy of seeking to increase deliveries in our three Southeast divisions and the Pacific Northwest division in order to more fully leverage our operating expense investment. The number of owned lots as of December 31, 2016 reflects our focus on managing our existing inventory across our geographies with a focus on improving our return metrics. On a segmented basis, our West operating segment had 3,205 owned lots and 870 controlled lots. Our Southeast operating segment had 826 owned lots and 1,737 controlled lots.


⁽¹⁾	Controlled lots are those subject to a purchase or option contract.

Revenue

For the three months ended March 31, 2017, total revenue increased by $26.3 million, or 38.5%, as compared to the three months ended March 31, 2016. The increase in total revenue was the result of an increase of 59 homes in home deliveries, an increase of $1.7 million in the ASP of homes delivered during the three months ended March 31, 2017 and an increase in land development revenue of $0.5 million, as compared to the three months ended March 31, 2016.

Homebuilding revenue for the three months ended March 31, 2017 increased by $25.8 million, or 37.8%, as compared to the three months ended March 31, 2016. The increase was primarily the result of a 35.3% increase in home deliveries and a 1.7% increase in the ASP of homes delivered to $416,000 during the three months ended March 31, 2017, as compared to the three months ended March 31, 2016. Of this revenue increase, $1.7 million was related to an increase in ASP and $24.1 million was related to the increase in homes delivered. The increase in ASP during the three months ended March 31, 2017 was primarily the result of an increase in the number of homes delivered in our West operating segment, which accounted for 71.2% of deliveries, or a 40.0% increase, during the three months ended March 31, 2017, as compared to the three months ended March 31, 2016.

Land development revenue for the three months ended March 31, 2017 increased by $0.5 million, as compared to the three months ended March 31, 2016. During the three months ended March 31, 2017, land development revenue consisted of the sale of one lot in our Red Hawk community and the recognition of deferred revenue in our Meadowood community, both located in Fresno County in California.

Cost of Sales

Cost of sales in our homebuilding segment for the three months ended March 31, 2017 increased by $20.4 million, or 36.4%, as compared to the three months ended March 31, 2016. Of this increase, $19.9 million was due to the increase in the number of homes delivered, and $0.7 million was due to the increase in the ASP and therefore cost per home sold during the three months ended March 31, 2017.

For the three months ended March 31, 2017, cost of sales in our land development segment increased by $14,000, or 3.0%, as compared to the three months ended March 31, 2016. The increase was primarily due to an increase in the number of lots sold and an increase in the average cost per lot sold during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016. Abandonment charges during the three months ended March 31, 2017 were $0.1 million.

We continuously evaluate our real estate inventories for impairment when conditions exist suggesting that the carrying amount of real estate inventories is not fully recoverable and may exceed its fair value.

Non-GAAP Financial Measures

InWe ~~addition to the results reported in accordance with GAAP, we~~ have provided information in this report relating to “adjusted gross margin” which is a non-GAAP financial measure. The most directly comparable GAAP financial measure is gross margin. We calculate adjusted gross margin from GAAP gross margin by adding back capitalized interest, and impairment and abandonment charges. We use adjusted gross margin information as a supplemental measure when evaluating our operating performance. We believe this information is meaningful, because it isolates the impact that leverage and non-cash impairment and abandonment charges have on gross margin. However, because adjusted gross margin information excludes interest expense, and impairment and abandonment charges, all of which have real economic effects and could materially impact our results, the utility of adjusted gross margin information as a measure of our operating performance is limited.

InOther ~~addition, other~~ companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance.

Gross Margin (“GM”) and Adjusted Gross Margin (“Adjusted GM”)

~~For~~Homebuilding gross margin percentage during the three months ended ~~September~~March 3031, ~~2016~~2017, ~~our~~increased ~~homebuilding gross margin percentage decreased~~ 0.47%, as compared to the ~~same~~three ~~period~~months inended ~~2015~~March 31, ~~partially due to the $0~~2016.2 ~~million~~The ~~real~~increase ~~estate~~in ~~impairment~~homebuilding ~~charge~~gross ~~that~~margin ~~occurred~~ during the ~~third~~three ~~quarter~~months ofended ~~2016~~March ~~related~~31, to2017 ~~the~~was ~~last~~primarily ~~four~~due ~~completed~~to: ~~homes~~(1) ~~available for sale, in~~ our ~~North~~ability ~~Carolina~~to ~~community,~~move ~~Heathers~~sales atprices ~~Westport. Additionally,~~higher ~~during~~coupled ~~the~~with ~~three~~our ~~months~~ability ~~ended~~to ~~September~~contain ~~30,~~the ~~2015,~~impact ~~we reduced cost~~ of ~~sales~~increasing ~~expense~~labor and ~~therefore~~material ~~increased~~costs, ~~homebuilding~~and ~~gross~~(2) ~~margin~~the bycontinued ~~$744,000~~shift orto ~~1.0%~~more asprofitable apre-sales ~~result~~homes ofwhile reducing ~~accrued~~the ~~expenses~~number ~~associated~~of ~~with~~sales ~~warranty~~of ~~reserves~~unsold ~~and~~homes. ~~other~~Homebuilding ~~accrued~~adjusted ~~construction~~gross ~~costs~~margin ~~related~~percentage toduring ~~prior~~the ~~years. Removing~~three ~~the~~months ~~real~~ended ~~estate~~March ~~impairment~~31, ~~and~~2017, ~~reversal~~increased of1.1%, ~~accrued~~as ~~expenses~~compared to the ~~homebuilding~~three ~~gross~~months ~~margin~~ended asMarch a31, ~~percentage~~2016. ofThe ~~revenue~~increase ~~would~~in ~~have~~homebuilding ~~been~~adjusted ~~18.8%~~gross ~~and~~margin ~~17.9%~~during ~~for~~ the three months ended ~~September~~March 3031, ~~2016~~2017 ~~and~~was ~~2015,~~primarily ~~respectively~~due to lower financing costs.

For the ~~nine~~three months ended ~~September~~March 3031, 2016, our homebuilding gross margin ~~percentage~~was ~~increased 0~~17.46%, asprimarily ~~compared~~due to an increase in the ~~same~~average ~~period~~gross margin in ~~2015,~~our ~~primarily~~East ~~due~~Garrison tomaster anplanned ~~increase~~community. inDuring ~~ASP~~the ~~that~~three ~~was~~months ~~partially~~ended ~~offset~~March by31, ~~impairments~~2016, ofASP ~~home~~in ~~inventory~~our West and Southeast operating segments of $0494,000 and $221,000, respectively.5 ~~million~~Homebuilding ~~and~~adjusted ~~cost~~gross ~~increases~~margin percentage during the ~~2016~~three ~~period~~months asended ~~compared~~March to31, ~~the~~2016 ~~2015~~was ~~period~~19.9%.

~~For~~Land ~~the~~Development ~~three~~Gross months ended September 30, 2016, our land development gross margin percentage decreased 34.1%, as compared to the same period in 2015, primarily due to the $2.1 million real estate impairment charge that occurred during the second quarter of 2016 related to a proposed land sale at Sundance. This land sale closed in the third quarter and, as a result of the previous impairment, this land sale did not result in a significant gross margin.Margin

~~For~~Land development gross margin percentage during the ~~nine~~three months ended ~~September~~March 3031, ~~2016,~~2017 ~~our~~was ~~land~~4.2%. Land development adjusted gross margin ~~percentage~~during ~~decreased~~the 53three months ended March 31, 2017 was 27.30%,. asLand ~~compared~~development togross margin and adjusted gross margin during the ~~same~~three ~~period~~months inended ~~2015~~March 31, 2017 was primarily due to ~~the~~an ~~$2.1~~increase ~~million~~in ~~real~~land ~~estate~~development ~~impairment~~revenue ~~charge~~and onan ~~Sundance~~increase ~~during~~in the ~~second~~number ~~quarter~~ of ~~2016~~lots ~~coupled~~sold, ~~with~~partially offset by a decision to abandon a number of land acquisition opportunities resulting in $0.51 million in abandonment charges.

40For the three months ended March 31, 2016, we did not sell any land, but recognized $0.4 million in abandonment charges, included as part of cost of sales - land development, in our West and Southeast operating segments.

The following table provides a reconciliation of adjusted gross margin information to gross margin information the most comparable GAAP financial measure:

($ in thousands)	Three months ended September 30,										Nine months ended September 30,
	Three months ended March 31,
	2016			%		2015			%		2016			%		2015			%
(Dollars in thousands)	2017			%		2016			%
Consolidated Gross Margin & Adjusted Gross Margin
Revenue	$	9394,~~740~~498		100.0	%	$	7368,~~672~~225		100.0	%	$	~~244,802~~		~~100.0~~	%	$	~~171,921~~		~~100.0~~	%
Cost of Sales	77,010			82.2	%	59,680			81.0	%	202,669			82.8	%	141,371			82.2	%
Cost of sales	77,230			81.7	%	56,667			83.1	%
Gross Margin	16,730			17.8	%	13,992			19.0	%	42,133			17.2	%	30,550			17.8	%
Gross margin	17,268			18.3	%	11,558			16.9	%
Add: interest in cost of sales	2,~~214~~361			2.45	%	1,~~443~~539			2.03	%	~~5,689~~			~~2.3~~	%	~~3,416~~			~~2.0~~	%
Add: impairment and abandonment charges	~~223~~204			0.2	%	~~144~~419			0.26	%	~~3,094~~			~~1.3~~	%	~~146~~			~~0.1~~	%
Adjusted Gross Margin(1)	$	19,167		20.4	%	$	15,579		21.1	%	$	50,916		20.8	%	$	34,112		19.8	%
Adjusted gross margin(1)	$	19,833		21.0	%	$	13,516		19.8	%
Consolidated Gross margin percentage	17.8		%			19.0		%			17.2		%			17.8		%
Consolidated gross margin percentage	18.3		%			16.9		%
Consolidated Adjusted gross margin percentage(1)	20.4		%			21.1		%			20.8		%			19.8		%
Consolidated adjusted gross margin percentage(1)	21.0		%			19.8		%
Homebuilding Gross Margin & Adjusted Gross Margin
Homebuilding revenue	$	8994,~~840~~002		100.0	%	$	7068,~~284~~225		100.0	%	$	~~239,480~~		~~100.0~~	%	$	~~163,705~~		~~100.0~~	%
Cost of home sales	7376,~~176~~755			81.57	%	5756,~~006~~206			8182.14	%	~~196,019~~			~~81.9~~	%	~~134,744~~			~~82.3~~	%
Homebuilding gross margin	1617,~~664~~247			18.53	%	1312,~~278~~019			1817.96	%	~~43,461~~			~~18.1~~	%	~~28,961~~			~~17.7~~	%
Add: interest in cost of home sales	12,~~990~~350			2.25	%	1,~~443~~539			2.13	%	~~5,319~~			~~2.2~~	%	~~3,367~~			~~2.1~~	%
Add: impairment and abandonment charges	~~192~~102			0.21	%	~~119~~—			~~0.2~~—	%	~~458~~			~~0.2~~	%	—			—	%
Adjusted homebuilding gross margin(1)	$	1819,~~846~~699		21.0	%	$	1413,~~840~~558		2119.19	%	$	~~49,238~~		~~20.6~~	%	$	~~32,328~~		~~19.7~~	%
Homebuilding gross margin percentage	18.53		%			1817.96		%			~~18.1~~		%			~~17.7~~		%
Adjusted homebuilding gross margin percentage(1)	21.0		%			2119.19		%			~~20.6~~		%			~~19.7~~		%
Land Development Gross Margin & Adjusted Gross Margin
Land development revenue	$	~~3,900~~496		100.0	%	$	~~1,116~~—		~~100.0~~—	%	$	~~5,322~~		~~100.0~~	%	$	~~3,156~~		~~100.0~~	%
Cost of land development	3,834			98.3	%	716			64.2	%	6,650			125.0	%	2,264			71.7	%
Cost of land development sales	475			95.8	%	461			—	%
Land development gross margin	6621			14.72	%	~~400~~(461		)	~~35.8~~—	%	~~(1,328~~		)	~~(25.0~~	)%	~~892~~			~~28.3~~	%
Add: interest in cost of land development	~~224~~11			52.72	%	—			—	%	~~370~~			~~7.0~~	%	49			~~1.6~~	%
Add: Impairment and abandonment charges	31			0.8	%	25			2.2	%	2,636			49.5	%	146			4.6	%
Add: impairment and abandonment charges	102			20.6	%	419			—	%
Adjusted land development gross margin(1)	$	~~321~~134		827.20	%	$	~~425~~(42	)	~~38.1~~—	%	$	~~1,678~~		~~31.5~~	%	$	~~1,087~~		~~34.4~~	%
Land development gross margin percentage	14.72		%			~~35.8~~—		%			~~(25.0~~		)%			~~28.3~~		%
Adjusted land development gross margin percentage(1)	827.20		%			~~38.1~~—		%			~~31.5~~		%			~~34.4~~		%
Other Revenue Gross and Adjusted Margin
Revenue	$	—		—	%	$	2,272		100.0	%	$	—		—	%	$	5,060		100.0	%
Cost of revenue	—			—	%	1,958			86.2	%	—			—	%	4,363			86.2	%
Other revenue gross and adjusted margin	$	—		—	%	$	314		13.8	%	$	—		—	%	$	697		13.8	%
Other revenue gross and adjusted margin percentage	—		%			13.8		%			—		%			13.8		%


*	Percentages may not add due to rounding.


⁽¹⁾	Adjusted gross margin, adjusted homebuilding gross margin and adjusted land development gross margin are non-GAAP financial measures.

Sales and Marketing, and General and Administrative Expenses (“SG&A”)

Our operating expenses for the three and nine months ended September 30, 2016 and 2015 were as follows:

	As a percentage of total revenue
	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Sales and marketing	5.2	%	6.4	%	5.6	%	7.7	%
General and administrative	4.9	%	7.5	%	7.8	%	11.2	%
Total sales and marketing and general and administrative	10.1	%	13.9	%	13.4	%	18.9	%

Sales and marketing expense for the three and nine months ended September 30, 2016 increased approximately $0.2 million and $0.3 million, respectively. The increase in sales and marketing expense was primarily attributable to the increase in homebuilding revenue of 27.8% and 46.3%, in each respective period, impacting variable sales expenses including commissions and closings costs, partially offset by a decrease in fixed sales and marketing expenses, during the three and nine months ended September 30, 2016, as compared to the same periods in 2015.

G&A expenses for the three and nine months ended September 30, 2016 decreased by approximately $0.9 million and $0.2 million, respectively, as compared to the same periods in 2015. The primary reason for the decrease in G&A expense during the quarter was the $2.4 million reduction in contingent consideration recorded in the current quarter as compared to a $1.0 million reduction in contingent consideration recorded in the same quarter of 2015. Contingent consideration is associated with the Citizens Acquisition. In addition, we recorded bonus expense for divisional and executive personnel in the current quarter when there was no such expense in the same period last year. We continued to reduce G&A expense as a percentage of revenue primarily due to revenue growth and our ability to continue to manage G&A expenses tightly.

Provision for Income Taxes

As a result of the analysis of all available evidence as of September 30, 2016 and 2015, we continued to record a full valuation allowance on our net deferred tax assets. If our assumptions change and we believe we will be able to realize these deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on our deferred tax assets will be recognized as a reduction of future income tax expense. If the assumptions do not change, in each period we could record an additional valuation allowance on any increases in the deferred tax assets.

For the three and nine months ended September 30, 2016, a provision for income taxes of $124,000 and $271,000, respectively, was recorded. No provision for income taxes was recorded for either the three or nine months ended September 30, 2015. See Note 12, “Income Taxes” and Note 1, “Organization, Basis of Presentation and Summary of Significant Accounting Policies--Income Taxes” to the accompanying unaudited condensed consolidated financial statements included elsewhere in this report for a further discussion of income taxes.

Net Income or Loss and Income or Loss per Share of Class A Common Stock

Our net income (or loss) and income (or loss) per share of Class A Common Stock for the three and nine months ended September 30, 2016 and 2015 were as follows:

Our net income for the three months ended September 30, 2016 decreased $0.7 million, as compared to same period in 2015. The net income attributable to UCP, Inc. for the three months ended September 30, 2016 was $1.3 million, as compared to $1.6 million for the three months ended September 30, 2015.

For the nine months ended September 30, 2016, our net income increased $7.0 million, as compared to the same period in 2015. The net income attributable to UCP, Inc. was $2.1 million for the nine months ended September 30, 2016, as compared to the net loss attributable to UCP, Inc. of $0.9 million for the nine months ended September 30, 2015.

EPS of UCP, Inc. Class A common stock for the three months ended September 30, 2016 was $0.16 per basic and diluted share, as compared to $0.21 per basic share and $0.20 per diluted share for the three months ended September 30, 2015.

For the nine months ended September 30, 2016, EPS of UCP, Inc. Class A common stock was $0.26 per basic and diluted share, as compared to the $0.11 loss per basic and diluted share for the nine months ended September 30, 2015.

~~REPORTING~~Sales ~~SEGMENTS~~and Marketing, and General and Administrative Expenses

~~The~~Our ~~Company~~operating ~~periodically~~expenses ~~evaluates~~for ~~its homebuilding and land development operations in an effort to allocate resources properly. Based on this evaluation,~~ the ~~Company~~three ~~has~~months ~~classified~~ended ~~its~~March ~~operating activities into two operating segments~~31, ~~West~~2017 and ~~Southeast.~~2016 ~~See~~were ~~Note~~as 10, “Segment Information” to the accompanying unaudited condensed consolidated financial statements included elsewhere in this report. The following table presents financial information related to our homebuilding and land development reporting segments for the periods indicated ($ in thousands)follows:

	Three months ended September 30,													Nine months ended September 30,
As a percentage of total revenue
	2016							2015						2016							2015
		Three months ended March 31,
	Revenues			Gross Margin		GM %		Revenues		Gross Margin		GM %		Revenues		Gross Margin			GM %		Revenues		Gross Margin		GM %
		2017		2016
Homebuilding
Sales and marketing		5.4	%	6.0	%
West	$	79,500		$	15,129	19.0	%	$	51,464	$	10,477	20.4	%	$	204,273	$	38,149		18.7	%	$	120,438	$	22,589	18.8	%
G&A		9.0	%	10.7	%
Southeast	10,340			1,535		14.8	%	18,820		2,801		14.9	%	35,207		5,313			15.1	%	43,267		6,372		14.7	%
Total SG&A		14.4	%	16.6	%
Total homebuilding	89,840			16,664		18.5	%	70,284		13,278		18.9	%	239,480		43,462			18.1	%	163,705		28,961		17.7	%
* Percentages may not add due to rounding.
Land development
West	3,900			66		1.7	%	1,116		400		35.8	%	5,322		(940		)	(17.7	)%	3,156		892		28.3	%
Southeast	—			—		—	%	—		—		—	%	—		(389		)	—	%	—		—		—	%
Total land development	3,900			66		1.7	%	1,116		400		35.8	%	5,322		(1,329		)	(25.0	)%	3,156		892		28.3	%
Other (a)	—			—		—	%	2,272		314		13.8	%	—		—			—	%	5,060		697		13.8	%
Total	$	93,740		$	16,730	17.8	%	$	73,672	$	13,992	19.0	%	$	244,802	$	42,133		17.2	%	$	171,921	$	30,550	17.8	%

~~(a) Other~~Sales ~~includes~~and ~~revenues~~marketing ~~from~~expense ~~construction~~for ~~management~~the ~~services~~three ~~the~~months ~~Company~~ended ~~acquired~~March as31, ~~part~~2017 ofincreased ~~the~~approximately ~~Citizens~~$1.1 ~~Acquisition~~million, ~~and~~or ~~are~~26.3%, ~~not~~as ~~attributable~~compared to the ~~homebuilding~~three ormonths ~~land~~ended ~~development~~March ~~operations~~31, 2016. The ~~business~~increase in sales and marketing expense was ~~sold~~primarily attributable to the 35.3% increase in the ~~fourth~~number ~~quarter~~of homes delivered and the associated commission and closing cost expenses on these deliveries, most notably in our West operating segment. As a percentage of ~~2015~~total revenue, sales and marketing expenses decreased primarily due to the ~~Company~~38.5% noincrease ~~longer~~in ~~provides~~total ~~construction~~revenue, ~~management~~during ~~services~~the three months ended March 31, 2017, as compared to ~~third~~the ~~parties~~three months ended March 31, 2016.

~~The~~G&A ~~homebuilding~~expenses ~~gross~~for ~~margin~~the ~~percentage~~three inmonths ~~our~~ended ~~West~~March ~~operating~~31, ~~segment~~2017 ~~for~~increased by approximately $1.2 million, or 16.9%, as compared to the three months ended ~~September~~March 3031, 2016. ~~decreased~~The toprimary ~~19.0%~~reason ~~from~~for ~~20.4%~~the increase in G&A expense during the ~~same~~three ~~period~~months inended ~~2015. The~~March ~~difference~~31, in2017 ~~gross~~was ~~margin~~an ~~from~~increase ~~year~~in tobonus ~~year~~expense isas a result of the ~~reversal~~Company’s ofincreased ~~accrued~~earnings ~~expenses,~~during ~~including~~the ~~accrued~~quarter ~~warranty~~coupled ~~and~~with ~~construction~~an ~~costs~~increase in ~~the~~stock-based ~~amount~~compensation ofand ~~$744,000. All~~legal offees ~~this~~associated ~~was~~with ~~recorded~~the inmerger ~~our~~agreement ~~West~~with ~~operating~~Century ~~segment~~Communities ~~during~~as compared to the three months ended ~~September~~March 3031, ~~2015~~2016. If ~~not~~For ~~for~~the ~~this~~three ~~reduction~~months inended ~~costs~~March 31, ~~the~~2016, ~~homebuilding~~we ~~gross~~recorded ~~margin~~$0.9 asmillion ain ~~percentage~~severance ofrelated ~~revenue~~expenses ~~would~~incurred ~~have~~and ~~been~~an 18$8,000 reduction in contingent consideration.9% ~~for~~Contingent consideration is associated with the ~~three~~Citizens ~~months~~Acquisition. ~~ended~~As ~~September~~a ~~30,~~percentage ~~2015~~of revenue, asG&A ~~compared~~expenses decreased to 199.0% ~~for~~primarily due to the ~~three~~revenue ~~months~~growth ~~ended~~and ~~September~~our ~~30,~~continued ~~2016~~focus to manage G&A expenses tightly.

AsOther previously discussed, the lower gross margin in our West land development segment for the three months ended September 30, 2016, as compared to the same period in 2015, was the result of the land sale in Bakersfield, California. These 65 lots were previously impaired and written down to fair value in the prior quarter. As a result, the gross margin recorded related to this sale was minimal.Income

Other income during the three months ended March 31, 2017 increased by approximately $0.4 million, as compared to the three months ended March 31, 2016, primarily due to the extinguishment of debt.

Provision for Income Taxes

For the three months ended March 31, 2017, a provision for income taxes of $621,000 was recorded as compared to $5,000 for the three months ended March 31, 2016. The difference in the amount of taxes recorded period over period is driven primarily as a result of the full valuation allowance we maintained on our deferred tax assets as of March 31, 2016. As of December 31, 2016 we concluded that it was more likely than not that we would realize the benefit of our deferred tax assets and, as such, the valuation allowance was reversed. See Note 12, “Income Taxes” and Note 1, “Organization, Basis of Presentation and Summary of Significant Accounting Policies--Income Taxes” to the accompanying unaudited condensed consolidated financial statements included elsewhere in this report for a further discussion of income taxes.

~~Homebuilding~~Net ~~Operations~~Income and Earnings per Share of Class A Common Stock

~~The~~Our ~~following~~net ~~charts~~income ~~present~~and ~~information~~earnings ~~concerning~~per ~~homes~~share ~~delivered,~~of ~~ASP~~Class ~~and~~A ~~revenue~~common stock for ~~our~~the ~~homebuilding~~three ~~operations~~months byended ~~our~~March ~~West~~31, 2017 and ~~Southeast~~2016 ~~operating~~were ~~segments~~as ~~($ in thousands)~~follows:

~~The~~As ~~increase~~a inresult of the ~~ASP~~foregoing offactors, aour ~~home~~net ~~delivered~~income infor ~~our~~the ~~West~~three ~~operating~~months ~~segment~~ended ~~during~~March 31, 2017 increased $3.2 million, as compared to the three months ended ~~September~~March 3031, 2016. ~~was~~The ~~largely~~net aincome ~~result~~attributable ofto ~~product~~UCP, ~~mix~~Inc. ~~with~~for ~~more~~the ~~expensive~~three ~~homes~~months ~~providing~~ended aMarch ~~higher~~31, ~~percentage~~2017 was $1.1 million, as compared to net income of ~~home~~$0.1 ~~closings~~million ~~during~~for ~~this~~the ~~period~~three months ended March 31, 2016.

Three Months Ended September 30, 2016
Segment	Homebuilding Revenue(in thousands)		% of Total Homebuilding Revenue		Homes Delivered	% of Total Homes Delivered		ASP(in thousands)
West	$	79,500	88.5	%	155	77.9	%	$	513
Southeast	10,340		11.5	%	44	22.1	%	235
Total	$	89,840	100.0	%	199	100.0	%	$	451

Net income attributable to UCP, Inc. for the three months ended March 31, 2017 was $1.1 million, as compared to net income of $0.1 million for the three months ended March 31, 2016.

Three Months Ended September 30, 2015
Segment	Homebuilding Revenue(in thousands)		% of Total Homebuilding Revenue		Homes Delivered	% of Total Homes Delivered		ASP(in thousands)
West	$	51,464	73.2	%	120	59.4	%	$	429
Southeast	18,820		26.8	%	82	40.6	%	230
Total	$	70,284	100.0	%	202	100.0	%	$	348

EPS of UCP, Inc. Class A common stock for the three months ended March 31, 2017 was $0.14 per basic and diluted share, as compared to $0.01 per basic share and diluted share for the three months ended March 31, 2016.

Nine Months Ended September 30, 2016
Segment	Homebuilding Revenue(in thousands)		% of Total Homebuilding Revenue		Homes Delivered	% of Total Homes Delivered		ASP(in thousands)
West	$	204,273	85.3	%	413	73.4	%	$	495
Southeast	35,207		14.7	%	150	26.6	%	235
Total	$	239,480	100.0	%	563	100.0	%	$	425

REPORTING SEGMENTS

Nine Months Ended September 30, 2015
Segment	Homebuilding Revenue(in thousands)		% of Total Homebuilding Revenue		Homes Delivered	% of Total Homes Delivered		ASP(in thousands)
West	$	120,438	73.6	%	283	59.2	%	$	426
Southeast	43,267		26.4	%	195	40.8	%	222
Total	$	163,705	100.0	%	478	100.0	%	$	348

The Company periodically evaluates its homebuilding and land development operations in an effort to allocate resources properly. Based on this evaluation, the Company has classified its operating activities into two operating segments, West and Southeast, and two reportable segments, Homebuilding and Land development. See Note 10, “Segment Information” to the accompanying unaudited condensed consolidated financial statements included elsewhere in this report. The following table presents financial information related to our homebuilding and land development reporting segments for the periods indicated:

For both the three and nine months ended September 30, 2016, the increase in the percentage of homes closed in the West operating segment reflects strong demand in our West operating segment throughout 2016 coupled with delays in opening new communities as a result of wet weather that delayed land development efforts in our Southeast operating segment during late 2015 and that has continued through 2016.



	Three months ended March 31,
	2017						2016
(Dollars in thousands)	Revenues		Gross Margin		GM %		Revenues		Gross Margin			GM %
Homebuilding
West	$	76,969	$	14,689	19.1	%	$	56,758	$	10,313		18.2	%
Southeast	17,033		2,558		15.0	%	11,467		1,706			14.9	%
Total homebuilding	94,002		17,247		18.3	%	68,225		12,019			17.6	%
Land development
West	496		21		4.2	%	—		(122		)	—	%
Southeast	—		—		—	%	—		(339		)	—	%
Total land development	496		21		4.2	%	—		(461		)	—	%
Total	$	94,498	$	17,268	18.3	%	$	68,225	$	11,558		16.9	%

As previously discussed, the higher gross margin for the three months ended March 31, 2017, as compared to the same period in 2016, was the result of the Company’s ability to raise sales prices in excess of cost increases.

~~Land~~Homebuilding ~~Development~~ Operations

The following charts and tables present information concerning ~~revenues~~homes ~~and~~delivered, ~~lots~~ASP ~~sold~~and revenue for our ~~land~~homebuilding ~~development~~ operations by our West and Southeast operating segments for the three months ended March 31, 2017 and 2016:

	Three months ended September 30,
	2016			2015
Segment	Land Development Revenue(in thousands)		Lots Sold	Land Development Revenue(in thousands)		Lots Sold
West	$	3,900	65	$	1,116	—
Southeast	—		—	—		—
Total	$	3,900	65	$	1,116	—

The decrease in the ASP of a home delivered in our West operating segment during the three months ended March 31, 2017 was largely a result of product mix with an increase in deliveries in entry level and first-time home buyer markets in the San Francisco Bay area division.

	Nine months ended September 30,
Three Months Ended March 31, 2017
	2016				2015
Segment	Homebuilding Revenue(in thousands)		% of Total Homebuilding Revenue		Homes Delivered		% of Total Homes Delivered		ASP(in thousands)
Segment	Land Development Revenue(in thousands)		Lots Sold		Land Development Revenue(in thousands)			Lots Sold
West	$	76,969	81.9	%	161		71.2	%	$	478
West	$	5,322	65		$	3,156		114
Southeast	17,033		18.1	%	65		28.8	%	262
Southeast	—		—		—			—
Total	$	94,002	100.0	%	226		100.0	%	$	416
Total	$	5,322	65		$	3,156		114



Three Months Ended March 31, 2016
Segment	Homebuilding Revenue (in thousands)		% of Total Homebuilding Revenue		Homes Delivered	% of Total Homes Delivered		ASP (in thousands)
West	$	56,758	83.2	%	115	68.9	%	$	494
Southeast	11,467		16.8	%	52	31.1	%	221
Total	$	68,225	100.0	%	167	100.0	%	$	409

For the three months ended March 31, 2017 and 2016, our West operating segment accounted for a majority of the percentage of homes closed. For the three months ended March 31, 2017, the increase in the percentage of homes closed in our West and Southeast operating segments reflect continued strong demand into 2017.

Land Development Operations

The following chart and table presents information concerning revenues and lots sold for our land development operations by our West and Southeast operating segments:



	Three months ended March 31,
	2017			2016
Segment	Land Development Revenue (in thousands)		Lots Sold	Land Development Revenue (in thousands)		Lots Sold
West	$	496	1	$	—	—
Southeast	—		—	—		—
Total	$	496	1	$	—	—

For the three months ended March 31, 2017, our West operating segment accounted for a majority of the lots sold.

LIQUIDITY AND CAPITAL RESOURCES

Our principal uses of capital for the three months ended March 31, 2017 and 2016 are funding our operating expenses, investing activities (principally acquiring and developing land, and building homes) and repaying liabilities. Our principal sources of liquidity are cash on hand, cash provided by operations and cash provided by financing activities (such as acquisition, development and construction financing). As of ~~September~~March 3031, ~~2016~~2017, we had approximately $2835.58 million of cash and cash equivalents, which includes $01.95 million of restricted cash. We also had available borrowing capacity on our acquisition, development and construction financing of $81.4 million, of which $6.1 million was immediately available and the remaining balance is available to fund project specific development activities as those progress during 2017.

~~For~~Our ~~the~~2017 ~~foreseeable~~Senior ~~future,~~Notes wewith ~~expect~~$75 ~~our~~million in principal ~~uses~~outstanding mature in October of ~~cash~~2017, and an additional $30.1 million in acquisition, development and construction (“ADC”) loans are also set to bemature ~~similar~~in the ordinary course of business. With respect to ~~what~~the ~~they~~$30.1 ~~have~~million ~~been~~in ADC loans maturing in 2017, these loans are project specific loans and are scheduled to mature in the ~~past. We~~ordinary course of closing out of the sales phase for each of these projects and we anticipate ~~funding~~the ~~future~~sales ~~capital~~proceeds ~~requirements~~from inthe designated home closings will provide a ~~manner~~more ~~similar~~than toadequate ~~our~~source ~~historical~~of ~~funding~~cash for the repayment of these loans. For athe ~~description~~2017 ofSenior Notes, we have various alternatives to meet this obligation when it comes due in October 2017. We believe that we currently have sufficient capital resources to fund our ~~outstanding~~operations ~~indebtedness~~for asat least the next twelve months including the repayment of ~~September 30,~~this ~~2016,~~debt ~~see~~obligation ~~Note~~when 7it matures. The sources include available cash, ~~“Notes~~available ~~Payable~~borrowing capacity and ~~Senior~~cash ~~Notes~~being generated from our backlog of home sales. As part of this consideration, ~~net”~~we togenerally have the ~~accompanying~~ability ~~unaudited~~to ~~condensed~~defer ~~consolidated~~future ~~financial~~investment ~~statements~~activity, ~~included~~such ~~elsewhere~~as inacquiring ~~this~~and ~~report.~~developing land, or building additional homes for sale where borrowing capacity is currently not available.

We also believe that we have access to ~~sufficient~~new ~~capital~~sources ~~resources to fund our business for at least the next twelve months, including the repayment~~ of ~~our debt obligation. We generally have the ability to defer future investment activity~~capital, ~~such~~ as ~~acquiring and developing land or building additional homes for sale~~needed, ~~until such time as we have adequate capital resources available~~ to ~~us. We~~fund ~~also~~further ~~have~~investment ~~the~~in ~~ability to sell land as an ordinary part of~~ our business, ~~which~~for island ~~influenced~~acquisitions ~~by supply~~ and ~~demand,~~new ~~and~~development ~~other factors in the markets where we own land~~activities. As of ~~September~~March 3031, ~~2016~~2017, our Debt to Total Capital and Net Debt to Total Capital, was 4241.04% and 4038.04%, respectively, providing us with significant financial flexibility.

~~Though~~Long-term ~~our~~Funding Senior Notes do not mature until October 2017, we are actively considering three primary alternatives to meet our obligations with respect to our Senior Notes. We may seek to extend the maturity of the Senior Notes or refinance the Senior Notes with new senior notes, including the option to arrange new senior notes in the public or private capital markets if conditions are favorable. We may also seek to refinance this indebtedness on a leverage neutral basis, by seeking to increase the amount of borrowings available under our acquisition, development and construction loans, which are secured by our real estate inventories. Finally, our cash position, which we believe we will continue to grow prior to maturity of the Senior Notes, may be used to meet a portion of our obligations with respect to the Senior Notes. Alternatively, we may choose to combine some or all of these, or other, potential sources of capital to meet our obligations with respect to the Senior Notes. Our determination of how to meet our obligations with respect to the Senior Notes and our success in so doing will depend upon various factors, including general market conditions, conditions in the credit markets, our financial position, operating performance, the value of our land inventories and prospects.Strategy

Our funding strategy contemplates the use of debt and ~~equity financing and~~ the reinvestment of cash from operations. We generally attempt to match the duration of our real estate assets with the duration of the capital that finances each real estate asset. We generally look to finance our homes under construction, which have a short duration, with a combination of long-term capital (equity and long-term debt) and short-term bank financing. We generally look to finance our finished lots that will be put in production within one year, and therefore have a short duration, with a combination of long-term capital (equity and long-term debt) and short-term bank financing. We generally look to finance our assets with a long duration, such as land held for future development or finished lots that will not be put into production for more than one year, with long-term capital (equity and long-term debt).

Senior Notes

The Senior Notes are guaranteed on an unsecured senior basis by each of our subsidiaries (the “Subsidiary Guarantors”). The Senior Notes and the guarantees are the Company’s, and the Subsidiary Guarantors’, senior unsecured obligations and rank equally in right of payment with all of our and the Subsidiary Guarantors’ existing and future senior unsecured debt and senior in right of payment to all of our and the Subsidiary Guarantors’ future subordinated debt. The Senior Notes and the guarantees are effectively subordinated to any of our and the Subsidiary Guarantors’ existing and future secured debt, to the extent of the value of the assets securing such debt.

We may redeem the Senior Notes, in whole but not in part, at any time at a price equal to 100% of the principal amount, plus accrued and unpaid interest, plus a “make-whole” premium. Upon the occurrence of a change of control, we must offer to repurchase the Senior Notes for cash at a price equal to 101% of the principal amount of the Senior Notes to be repurchased plus accrued and unpaid interest to, but excluding, the repurchase date. Under the Indenture, a “change of control” generally means (i) any person or group of related persons acquires more than 35% of our voting stock or (ii) we transfer all or substantially all of our consolidated assets to any person or group of related persons, in each case other than PICO and its affiliates.

The Indenture provides for customary “events of default” which could cause, or permit, the acceleration of the Senior Notes. Such events of default include: (i) a default in any payment of principal or interest on the Senior Notes; (ii) failure to comply with certain

~~covenants~~Senior contained in the Indenture; (iii) defaults under certain other indebtedness or the acceleration of certain other indebtedness prior to maturity; (iv) the failure to pay certain final judgments; and (vi) certain events of bankruptcy or insolvency. Notes

The ~~Indenture~~2017 ~~limits~~Notes ~~our~~were ~~and~~issued ~~our~~under ~~subsidiaries’~~an ~~ability to~~Indenture, ~~among~~dated ~~other~~as ~~things,~~of ~~incur~~October or21, ~~guarantee~~2014 ~~additional~~(the ~~unsecured~~“Indenture”) and ~~secured~~are ~~indebtedness~~guaranteed ~~(provided~~on ~~that~~an weunsecured ~~may~~senior ~~incur~~basis ~~indebtedness~~by soeach ~~long~~of as our ~~ratio~~subsidiaries ~~of indebtedness to consolidated tangible assets~~ (onthe a“Subsidiary ~~pro forma basis~~Guarantors”). ~~would~~The beSenior ~~equal~~Notes toand orthe ~~less~~guarantees ~~than~~are ~~45%~~the Company’s, and ~~provided that~~ the ~~aggregate~~Subsidiary ~~amount~~Guarantors’, ofsenior ~~secured~~unsecured ~~debt~~obligations ~~may~~and ~~not~~rank ~~exceed~~equally ~~the~~in ~~greater~~right of ~~$75~~payment ~~million~~with orall ~~30%~~ of our ~~consolidated~~and ~~tangible~~the ~~assets);~~Subsidiary ~~pay~~Guarantors’ ~~dividends~~existing and ~~make~~future ~~certain~~senior ~~investments~~unsecured debt and ~~other~~senior ~~restricted~~in ~~payments,~~right ~~including purchase~~ of ~~our~~payment ~~stock;~~to ~~acquire~~all ~~unimproved real property in excess~~ of ~~$75~~our ~~million~~and ~~per~~the ~~fiscal~~Subsidiary ~~year~~Guarantors’ orfuture insubordinated ~~excess~~debt. ofThe ~~$150~~2017 ~~million over the term of the Senior~~ Notes, ~~except~~and to the ~~extent~~guarantees ~~funded~~are ~~with~~effectively subordinated ~~obligations~~to orany ~~the proceeds~~ of ~~equity~~our ~~issuances;~~and ~~create~~the orSubsidiary ~~incur~~Guarantors’ ~~certain~~existing ~~liens; transfer or sell certain assets;~~ and ~~merge~~future orsecured ~~consolidate~~debt, ~~with~~to ~~other~~the ~~companies~~extent orof ~~transfer~~the orvalue ~~sell~~of ~~all~~the orassets ~~substantially~~securing ~~all~~such ~~of our consolidated assets~~debt.

~~Additionally,~~We may redeem the ~~Indenture~~2017 ~~requires~~Notes, usin ~~to:~~whole ~~(i)~~but ~~maintain~~not in part, at ~~least~~any ~~$50~~time ~~million~~at a price equal to 100% of ~~consolidated~~the ~~tangible~~principal ~~assets~~amount, ~~not~~plus ~~subject~~accrued toand ~~liens~~unpaid ~~securing~~interest, ~~indebtedness~~plus ~~(the~~a “~~Minimum~~make-whole” ~~Unlevered~~premium. ~~Asset~~The ~~Pool~~make-whole ~~Test”);~~premium ~~(ii)~~is ~~maintain~~approximately a$531,000 ~~minimum~~per ~~net~~month ~~worth~~for ofeach atmonth ~~least~~that ~~$175~~we ~~million~~pre-pay (the ~~“Minimum~~2017 ~~Net~~Notes ~~Worth~~in ~~Test”);~~advance. ~~(iii)~~Upon ~~maintain~~the occurrence of a ~~minimum~~change of ~~$15~~control, ~~million~~we ofmust ~~unrestricted~~offer ~~cash~~to ~~and/or~~repurchase the 2017 Notes for cash ~~equivalents~~at (a price equal to 101% of the ~~“Minimum~~principal ~~Liquidity~~amount ~~Test”);~~of the 2017 Notes to be repurchased plus accrued and ~~(iv)~~unpaid ~~not~~interest ~~permit~~to, ~~decreases~~but inexcluding, the ~~amount~~repurchase date. Under the Indenture, a “change of ~~consolidated~~control” ~~tangible~~generally ~~assets~~means by(i) any person or group of related persons acquires more than ~~$25~~35% ~~million~~of inour ~~any~~voting ~~fiscal~~stock ~~year~~or (ii) we transfer all or ~~more~~substantially ~~than~~all ~~$50~~of ~~million~~our atconsolidated ~~any~~assets ~~time~~to ~~after~~any ~~the~~person ~~issuance~~or group of ~~the~~related ~~Senior~~persons, ~~Notes~~in ~~(the~~each ~~“Consolidated~~case ~~Tangible~~other ~~Assets~~than ~~Test”)~~PICO and its affiliates.

The ~~foregoing~~Indenture isprovides ~~only~~for acustomary ~~brief~~“events ~~description~~of default” which could cause, or permit, the acceleration of the ~~Senior~~2017 Notes. ~~and~~Such isevents ~~qualified~~of default include: (i) a default in ~~its~~any ~~entirety~~payment byof ~~reference~~principal or interest on the 2017 Notes; (ii) failure to comply with certain covenants contained in the Indenture; (iii) defaults under certain other indebtedness or the acceleration of certain other indebtedness prior to maturity; (iv) the failure to pay certain final judgments; and (vi) certain events of bankruptcy or insolvency.

AsThe ~~set~~Indenture ~~forth~~limits ~~below,~~our asand ofour ~~September 30~~subsidiaries’ ability to, ~~2016~~among other things, incur or guarantee additional unsecured and secured indebtedness (provided that we ~~were~~may inincur ~~compliance~~indebtedness ~~with~~so ~~each~~long as our ratio of ~~the~~indebtedness ~~Minimum~~to ~~Unlevered~~consolidated ~~Asset~~tangible ~~Pool~~assets ~~Test,~~(on a pro forma basis) would be equal to or less than 45% and provided that the ~~Minimum~~aggregate ~~Net~~amount ~~Worth~~of ~~Test,~~secured debt may not exceed the ~~Minimum~~greater ~~Liquidity~~of ~~Test~~$75 million or 30% of our consolidated tangible assets); pay dividends and ~~the~~make ~~Consolidated~~certain ~~Tangible~~investments ~~Assets~~and ~~Test. Capitalized~~other ~~terms~~restricted ~~used~~payments, including purchase of our stock; acquire unimproved real property in excess of $75 million per fiscal year or in excess of $150 million over the ~~following~~term ~~table~~of ~~shall~~the ~~have~~2017 Notes, except to the ~~meanings~~extent ~~assigned~~funded ~~thereto~~with insubordinated obligations or the ~~Indenture~~proceeds of equity issuances; create or incur certain liens; transfer or sell certain assets; and merge or consolidate with other companies or transfer or sell all or substantially all of our consolidated assets.

Additionally, the Indenture requires us to: (i) maintain at least $50 million of consolidated tangible assets not subject to liens securing indebtedness (the “Minimum Unlevered Asset Pool Test”); (ii) maintain a minimum net worth of at least $175 million (the “Minimum Net Worth Test”); (iii) maintain a minimum of $15 million of unrestricted cash and/or cash equivalents (the “Minimum Liquidity Test”); and (iv) not permit decreases in the amount of consolidated tangible assets by more than $25 million in any fiscal year or more than $50 million at any time after the issuance of the 2017 Notes (the “Consolidated Tangible Assets Test”).

The foregoing is only a brief description of the 2017 Notes and is qualified in its entirety by reference to the Indenture.

As set forth below, as of March 31, 2017, we were in compliance with each of the Minimum Unlevered Asset Pool Test, the Minimum Net Worth Test, the Minimum Liquidity Test and the Consolidated Tangible Assets Test. Capitalized terms used in the following table shall have the meanings assigned thereto in the Indenture.

	As of September 30, 2016			Requirement
(In thousands, except percentages)	As of March 31, 2017			Requirement
	(In thousands)
Minimum Unlevered Asset Pool Test
Consolidated Tangible Assets	$	409,289
Consolidated tangible assets	$	423,649
Consolidated Tangible Assets subject to Liens (1)	206,261
Consolidated tangible assets subject to liens (1)	218,585
Consolidated Tangible Assets not subject to Liens (1)	$	203,028		≥ $ 50,000
Consolidated tangible assets not subject to liens (1)	$	205,064		≥ $ 50,000
Minimum Net Worth Test
Consolidated Tangible Assets	$	409,289
Consolidated tangible assets	$	423,649
Total Indebtedness	157,785
Total indebtedness	161,551
Net Worth	$	251,504		≥ $ 175,000
Net worth	$	262,098		≥ $ 175,000
Minimum Liquidity Test
Cash and Cash Equivalents	$	28,486
Cash and cash equivalents	$	35,817
Restricted Cash (2)	900
Restricted cash (2)	1,547
Unrestricted Cash and Cash Equivalents (2)	$	27,586		≥ $ 15,000
Unrestricted cash and cash equivalents (2)	$	34,270		≥ $ 15,000
	(In thousands)
Consolidated Tangible Assets Test				Requirement
Consolidated Tangible Assets as of September 30, 2016	$	409,289
Consolidated tangible assets as of March 31, 2017	$	423,649
Consolidated Tangible Assets as of January 1, 2016	400,818
Consolidated tangible assets as of January 1, 2017	414,138
Increase in Consolidated Tangible Assets during 2016 (3)	$	8,471		Δ ≥ ( $25,000)
Increase in consolidated tangible assets during 2017 (3)	$	9,511		Δ ≥ ( $25,000)
Consolidated Tangible Assets as of September 30, 2016	$	409,289
Consolidated tangible assets as of March 31, 2017	$	423,649
Consolidated Tangible Assets as of October 21, 2014	293,784
Consolidated tangible assets as of October 21, 2014	293,784
Increase in Consolidated Tangible Assets since October 21, 2014 (3)(4)	$	115,505		Δ ≥ ($50,000)
Increase in consolidated tangible assets since October 21, 2014 (3)(4)	$	129,865		Δ ≥ ($50,000)
Funded Debt to Tangible Assets Ratio Test
Funded Debt as of September 30, 2016	$	157,785
Funded debt as of March 31, 2017	$	161,551
Consolidated Tangible Assets as of September 30, 2016	409,289
Consolidated tangible assets as of March 31, 2017	423,649
Funded Debt to Tangible Assets Ratio	39		%	≤ 45%
Funded debt to tangible assets ratio	38		%	≤ 45%


(1)	“Liens,” as used in this table, means Liens other than Liens of the type described in clauses (b), (c), (e), (f), (h), (i), (j), (t), (v), (w), (x) and (y) of the definition of “Permitted Liens” under the Indenture. In general, this excludes certain Liens securing obligations that are not indebtedness for money borrowed.


(2)	Unrestricted cash and cash equivalents excludes restricted cash and other restricted cash balance requirements. Restricted cash excludes the $15 million requirement under the Indenture for purposes of the tests shown above.

(3) We may not permit our Consolidated Tangible Assets to decrease by more than $25 million in any fiscal year or more than $50 million in the aggregate at any time after October 21, 2014 (i.e. the date of ~~the~~ issue of the ~~Senior~~2017 Notes).

(4) Based on Consolidated Tangible Assets as of September 30, 2014, the end of the quarter immediately preceding the issue of the ~~Senior~~2017 Notes.

In addition, (i) as of ~~September~~March 3031, ~~2016~~2017 no Default or Event of Default (as such terms are defined in the Indenture) had occurred under the Indenture; (ii) all Asset Dispositions (as defined in the Indenture) made under the “Asset Disposition” covenant contained in the Indenture (Section 3.10) during the three months ended ~~September~~March 3031, ~~2016~~2017 were made in compliance with such covenant; and (iii) any Restricted Payments (as defined in the Indenture) made during the three months ended ~~September~~March 3031, ~~2016~~2017 complied in all respects with the requirements of the “Restricted Payments” covenant contained in the Indenture (Section 3.19).

Non-GAAP Financial Measure

In addition to the results reported in accordance with GAAP, we have provided information in this report relating to “net debt-to-capital ratio” which is a non-GAAP financial measure. The most directly comparable GAAP financial measure is the ratio of debt-to-capital. We believe that our leverage ratios provide useful information to the users of our financial statements regarding our financial position and cash and debt management.

The ratio of net debt-to-capital is computed as the quotient obtained by dividing net debt (which is debt less unrestricted cash and cash equivalents) by the sum of net debt plus stockholders’ and member's equity. We believe the ratio of net debt-to-capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing. We reconcile this non-GAAP financial measure to the ratio of debt-to-capital in the table above.

In addition, other companies may not calculate net debt-to-capital ratios in the same manner that we do. Accordingly, the net debt-to-capital ratio should be considered only as a supplement to the ratio of debt-to-capital information as a measure of our financial leverage.

Debt-to-Capital and Net Debt-to-Capital Ratios

The following table provides a reconciliation of our net debt-to-capital ratio to the most comparable GAAP financial measure ~~($ in thousands)~~:

	As of September 30, 2016			As of December 31, 2015
(Dollars in thousands)	As of March 31, 2017			As of December 31, 2016
Debt	$	~~157~~161,~~785~~551		$	~~155~~160,~~966~~994
Equity	~~217~~228,~~472~~510			~~217~~226,~~408~~886
Total capital	$	~~375~~390,~~257~~061		$	~~373~~387,~~374~~880
Ratio of debt-to-capital	4241.04		%	41.85		%
Debt	$	~~157~~161,~~785~~551		$	~~155~~160,~~966~~994
Net cash and cash equivalents	$	2835,~~486~~817		$	4042,~~729~~478
Less: restricted cash and minimum liquidity requirement	1516,~~900~~552			1516,~~900~~547
Unrestricted cash and cash equivalents	$	1219,~~586~~265		$	2425,~~829~~931
Net debt	$	~~145~~142,~~199~~286		$	~~131~~135,~~137~~063
Equity	~~217~~228,~~472~~510			~~217~~226,~~408~~886
Total adjusted capital	$	~~362~~370,~~671~~796		$	~~348~~361,~~545~~949
Ratio of net debt-to-capital (1)	4038.04		%	37.63		%


⁽¹⁾	The ratio of net debt-to-capital is a non-GAAP financial measure.

Cash Flows - ~~Nine~~Three Months Ended ~~September~~March 3031, ~~2016~~2017 Compared to ~~Nine~~Three Months Ended ~~September~~March 3031, ~~2015~~2016

Our comparison of cash flows for the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017, as compared to the ~~nine~~three months ended ~~September~~March 3031, ~~2015~~2016, is as ~~follows~~follow ($ in thousands):

Cash flows used in operating activities ~~were~~decreased ~~reduced~~ by $448.5 million as compared to 2016 primarily due to the following:

• We generated $114.32 million of net income before non-cash expenses of stock-based compensation, impairment and abandonment charges on real estate inventories, ~~depreciation and amortization, goodwill impairment, bad debt expense,~~ as well as, andepreciation ~~adjustment~~and toamortization ~~the fair value of our contingent consideration~~ as compared to a net ~~loss~~income before non-cash expenses of $01.50 million for the same period during ~~2015~~2016.

• We used $2315.13 million to finance an increase in real estate inventories, aan ~~decrease~~increase of $374.65 million as compared to the same period during ~~2015~~2016. The increase in inventories during the ~~September~~March 3031, ~~2016~~2017 period was primarily attributable to a $16.5 million increase in the amount of homes completed or under construction and $11.34 million increase in the amount of land held and land under development, partially offset by a $13.3 million decrease in finished lots. As of ~~September~~March 3031, ~~2016~~2017, we had ~~559~~560 homes in inventory as compared to ~~475~~452 homes in inventory as of ~~September~~March 3031, ~~2015~~2016.

• We generated $31.62 million in other assets and receivables during the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017, as compared to $2.1.0 million we used to finance growth in other assets and receivables during the same period in ~~2015~~2016.

Cash flows used in investing activities increased $0.21 million as compared to 2016 primarily due to the following:

• We ~~decreased~~increased our purchases of fixed assets by $0.1 million during the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017, as compared to the same period in ~~2015~~2016.

Cash flows ~~from~~used in financing activities ~~decreased~~increased $~~37.~~5.0 million as compared to 2016 primarily due to the following:

• We decreased our net borrowings by $332.50 million as compared to the same period in ~~2015~~2016. The net borrowings during the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017 were proceeds from acquisition, development and construction loans which totaled $~~106~~39.78 million while repayments on these loans totaled $~~105~~39.54 million.

• We incurred $0.19 million in debt issuance costs for the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017, as compared to $~~0.7~~12,000 ~~million~~ for the same period during ~~2015~~2016.

• We paid $41.89 million in a cash tax distribution to our noncontrolling interest (i.e. PICO) during the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017. For the same period in ~~2015~~2016, we paid ano cash tax distribution to our noncontrolling interest (i.~~e. PICO) of $1.0 million.~~

As of ~~September~~March 3031, ~~2016~~2017, our cash, ~~and~~ cash equivalents ~~balance,~~and ~~excluding~~ restricted cash, balance was $2735.68 million.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

Our off-balance sheet arrangements and contractual obligations have been disclosed in the accompanying unaudited condensed consolidated financial statements as noted below:

Land Purchase and Land Option Contracts

For information regarding our land purchase and land option contracts, see Note 11, “Commitments and Contingencies--Purchase Commitments” to the accompanying unaudited condensed consolidated financial statements included elsewhere in this report.

Loan Commitments

For information regarding our debt, see Note 7, “Notes Payable and Senior Notes, net” to the accompanying unaudited condensed consolidated financial statements included elsewhere in this report.

Surety Bonds

For information regarding our surety bonds, see Note 11, “Commitments and Contingencies--Surety Bonds” to the accompanying unaudited condensed consolidated financial statements included elsewhere in this report.

INFLATION AND SEASONALITY

Inflation

Our business can be adversely impacted by inflation, primarily from higher land, financing, labor, material and construction costs. In addition, inflation can lead to higher mortgage rates, which can significantly affect the affordability of mortgage financing to home buyers. While we attempt to pass on cost increases to customers through increased prices, when weak housing market conditions exist, we are often unable to offset cost increases with higher selling prices. Additionally, rising mortgage rates may result in a decrease in the number of homes we sell and a reduction in selling prices.

Seasonality

Historically, the homebuilding industry experiences seasonal fluctuations in quarterly operating results and capital requirements. We typically experience the highest new home order activity in spring and summer, although this activity is also highly dependent on the number of active selling communities, the timing of new community openings and other market factors. Since it typically takes four to six months to construct a new home, we generally deliver more homes in the second half of the year as spring and summer home orders convert to home deliveries. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters, and the majority of cash receipts from home deliveries occur during the second half of the year. We expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding industry.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1, “Organization, Basis of Presentation and Summary of Significant Accounting Policies” to the accompanying unaudited condensed consolidated financial statements included elsewhere in this report regarding the impact of certain recent accounting pronouncements on our accompanying unaudited condensed consolidated financial statements.

~~Item~~ITEM 3. ~~Quantitative~~QUANTITATIVE ~~and~~AND ~~Qualitative~~QUALITATIVE ~~Disclosure~~DISCLOSURE ~~about~~ABOUT ~~Market~~MARKET ~~Risk~~RISK

WeMarket ~~are~~risk ~~exposed~~includes torisks that arise from changes in interest rates, equity prices and other market ~~risks~~changes that affect market sensitive instruments. Our primary market risk related to fluctuations in interest rates on our ~~outstanding~~ variable interest rate debt, which consists of our secured acquisition, construction and development loans. As of ~~September~~March 3031, ~~2016~~2017, we had approximately $7883.2 million of variable interest rate debt outstanding (or 4951.3% of total indebtedness) with a weighted average interest rate of 4.64% per annum. If interest rates on our variable interest rate debt increase or decrease by 0.1 percent, our interest expense will increase or decrease by approximately $7883,000. We did not hedge our exposure to changes in interest rates with swaps, forward or option contracts on interest rates, or other types of derivative financial instruments during the three months ended ~~September~~March 3031, ~~2016~~2017. However, we may choose to hedge our exposure to changes in interest rates with these or other types of instruments in the future if, for example, we incur significant amounts of additional variable rate debt. We have not entered into and currently do not hold derivatives for trading or speculative purposes.

Based on the current amount and terms of our variable interest rate debt, we do not believe that the future changes in interest rates will have a material adverse impact on our financial position, results of operations or liquidity.

~~Item~~ITEM 4. ~~Controls~~CONTROLS ~~and~~AND ~~Procedures~~PROCEDURES

Evaluation of Disclosure Controls and Procedures

With the participation of our principal executive officer and principal financial officer, our management evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15(d)- 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of ~~September~~March 3031, ~~2016~~2017. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of ~~September~~March 3031, ~~2016~~2017.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended ~~September~~March 3031, ~~2016~~2017, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

~~Item~~ITEM 1. ~~Legal~~LEGAL ~~Proceedings~~PROCEEDINGS

We are not currently a party to any material litigation; however, the nature of our business exposes us to the risk of claims and litigation in the normal course of business. Other than routine litigation arising in the normal course of business, we are not presently subject to any material litigation, nor, to our knowledge, is any material litigation threatened against us. Although we are not currently involved in any material litigation, legal proceedings, regardless of outcome, can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. See Note 11, “Commitments and Contingencies,” to the accompanying unaudited condensed consolidated financial statements included elsewhere in this report.

~~Item~~ITEM 1A. ~~Risk~~RISK ~~Factors~~FACTORS

There have been no material changes in our assessment of our risk factors from those set forth in our Annual Report Form 10-K for the year ended December 31, ~~2015~~2016.

~~Item~~ITEM 2. ~~Unregistered~~UNREGISTERED ~~Sales~~SALES ofOF ~~Equity~~EQUITY ~~Securities~~SECURITIES ~~and~~AND ~~Use~~USE ofOF ~~Proceeds~~PROCEEDS

Issuer Purchases of Equity Securities

The following table summarizes repurchases of our Class A common stock made during the three months ended ~~September~~March 3031, ~~2016~~2017:

Period	Total number of shares of Class A common stock purchased (a)	Average price paid per share of Class A common stock (a)		Total number of shares of Class A common stock purchased as part of publicly announced plans or programs (ab)	Maximum dollar value of shares of Class A common stock that may yet be purchased under the plans or programs (bc)
July 1 to July 30, 2016	25,620	$	8.08	25,620	$	4,633,473
January 1 to January 31, 2017	—	$	—	—	$	3,750,011
August 1 to August 31, 2016	76,951	$	8.23	76,951	$	4,000,006
February 1 to February 28, 2017	—	$	—	—	$	3,750,011
September 1 to September 30, 2016	—	$	—	—	$	4,000,006
March 1 to March 31, 2017	—	$	—	—	$	3,750,011
Total	~~102,571~~—	$	~~8.19~~—	~~102,571~~—	$	43,~~000~~750,~~006~~011

(a) ~~These~~Average ~~amounts~~price ~~represent~~paid ~~shares~~per ~~repurchased~~share byof ~~the~~Class ~~Company~~A ~~under~~common ~~its Stock Repurchase Program. For additional information regarding~~ stock ~~repurchases~~repurchased, ~~see~~inclusive ~~Note~~of ~~9, “Equity,” to the accompanying unaudited condensed consolidated financial statements included elsewhere in this report~~commissions.

(b) ~~Under~~ ~~the~~These ~~Stock~~amounts ~~Repurchase~~represent ~~Program,~~shares ~~which~~repurchased ~~was~~by ~~established~~the onCompany ~~June~~under 6,its ~~2016,~~Stock ~~management~~Repurchase ~~is authorized to purchase up to $5~~Program.0 ~~million~~For ofadditional ~~Class~~information Aregarding ~~common~~ stock ~~through June 1~~repurchases, ~~2018. During~~see ~~the~~Note ~~three months ended September 30~~9, ~~2016,~~“Equity--Stock ~~there~~Repurchase ~~were an aggregate of 102~~Program,~~571~~” ~~shares~~to ofthe ~~Class~~accompanying Aunaudited ~~common~~condensed ~~stock~~consolidated ~~repurchased~~financial ~~for~~statements ~~$840,000,~~included ~~inclusive~~elsewhere ofin ~~commissions~~this report.

~~Item~~(c) 3Under the Stock Repurchase Program, which was established on June 6, 2016, management is authorized to purchase up to $5. ~~Defaults~~0 ~~Upon~~million ~~Senior~~of ~~Securities~~Class A common stock through June 1, 2018. During the three months ended March 31, 2017, there were no shares of Class A common stock repurchased.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

~~Item~~ITEM 4. ~~Mine~~MINE ~~Safety~~SAFETY ~~Disclosures~~DISCLOSURES

Not applicable.

~~Item~~ITEM 5. ~~Other~~OTHER ~~Information~~INFORMATION

None.

~~Item~~ITEM 6. ~~Exhibits~~EXHIBITS

Exhibit Number		Exhibit Description
2.1		Agreement and Plan of Merger, dated April 10, 2017, among Century Communities, Inc., Casa Acquisition Corp., and UCP, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (filed April 11, 2017))
3.1		Amendment to the Amended and Restated Bylaws, as amended, of UCP, Inc., effective April 10, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (filed April 11, 2017))
10.1*		Amended and Restated Employment Agreement, dated as of February 1, 2017, between UCP, Inc. and Dustin L. Bogue (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K (filed February 3, 2017))
10.2*		Amended and Restated Employment Agreement, dated as of February 1, 2017, between UCP, Inc. and James M. Pirrello (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K (filed February 3, 2017))
10.3		Agreement, made and entered into as of March 29, 2017, by and between PICO Holdings, Inc. and UCP, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (filed March 30, 2017))
10.4		Voting Support and Transfer Restriction Agreement, dated April 10, 2017, by and among Century Communities, Inc., PICO Holdings, Inc., UCP, Inc. and UCP, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (filed April 11, 2017))
10.5		Agreement to Exchange, entered into as of April 10, 2017, by and among UCP, Inc., UCP, LLC and PICO Holdings, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (filed April 11, 2017))
10.6*		Amendment to Employment Agreement, dated April 10, 2017, by and between Dustin L. Bogue and UCP, Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (filed April 11, 2017))
31.1		Certification of Dustin L. Bogue, Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of James M. Pirrello, Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Dustin L. Bogue, 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 James M. Pirrello, 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.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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.

		UCP, Inc.
Date:	~~October~~May 315, ~~2016~~2017	By:	/s/	James M. Pirrello
		James M. Pirrello
		Chief Financial Officer, Chief Accounting Officer & Treasurer
		(Principal Financial Officer and Authorized Signatory)

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